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What’s going on in Credit Suisse’s global markets business?

Tidjane Thiam fixed income strategy

"So, you're planning to increase revenues by up to 90% while cutting costs?"

Today is the day in which Credit Suisse whopped out its first quarter results. Needless to say, these are the first results since the Swiss bank divulged $346m of writedowns in late March and announced plans to increase cost-cutting and accelerate its restructuring. 

If you work in global markets at Credit Suisse today’s results aren’t good. They’re very bad. Precisely how bad is outlined below.

1. Credit Suisse’s global markets business has fallen into a hole

Today’s results are obscured by a lot of restructuring-related “noise”. Even so, it’s difficult to evade the fact that the cost income ratio in Credit Suisse’s global markets division stood at an unacceptable 158% in the first quarter, up from an acceptable 65% in the first quarter of 2015.

Even allowing for restructuring expenses of CHF100m, Credit Suisse’s global markets division made a CHF500m loss in the first quarter of the year. This is not a sustainable business.

2. Long-term, Thiam is expecting fixed income sales and trading revenues to increase by up to 90% on the historical average

Since joining Credit Suisse last June, Thiam has generally refused to provide revenue guidance. Today, that all seemed to change

In the investor call accompanying the results, J.P. Morgan banking analyst Kian Abouhossein said Credit Suisse’s fixed income currencies and commodities (FICC) revenues have been around CHF4bn [per annum] and asked what they’re likely to be in future. Thiam said it’s difficult to say exactly, but that the long-term target for FICC revenues at Credit Suisse is CHF6.5 to CHF7.5bn – an increase of nearly 90%.

At the same time, Thiam said long-term costs in the FICC business are being targeted at CHF5.4bn.

In other words, despite the cost-cutting programme, fixed income costs are expected to rise. And despite cuts to the risk weighted assets allocated to the fixed income trading business, revenues are expected to go through the roof. Long-term, Thiam aspires to generate an (exceptionally ambitious) 15% return on equity from fixed income trading.

This all seems weird, particularly as global markets revenues at Credit Suisse fell by 60% year-on-year in the first quarter, and fixed income revenues fell by 82%. It’s possible that Thiam was referring to revenues across Credit Suisse’s markets business as a whole and said fixed income by mistake – although this isn’t the sort of mistake you’re supposed to make if you’re CEO. CS insiders confirm that they heard these fixed income figures too.

3. The global markets redundancies? They’ve barely begun 

Thiam is planning to achieve these big increases in fixed income revenues despite slashing headcount. As of Q1, Credit Suisse had cut 1,000 people from its global markets business. By the end of 2016, it wants to cut 3,500. Only another 2,500 to go…

Year-on-year, Credit Suisse actually increased its global markets headcount from 12,300 to 12,790 in the first quarter. Credit Suisse CFO David Mathers noted that it takes three to six months for redundancy programmes to take effect and warned that headcount costs may even rise in the second quarter.

4. The global markets redundancies? They’re not about ‘juniorization’

When banks like Credit Suisse cut staff, they dump senior people and replace them with experience mid-rankers in a process of ‘juniorization’. Right? Wrong.

Credit Suisse said that the 1,000 markets people it eliminated in the first quarter will save it CHF260m annually. The implication, therefore, is that they were earning around CHF260k each – including employer’s taxes. Average pay per head in Credit Suisse’s markets division was CHF263k last year. In other words, CS is getting rid of average people – not its highest earners.

5. Credit Suisse is focusing on top clients too

If you work in a sales role in an investment bank, you need to watch out – unless you service the biggest and most lucrative clients.

The situation for Credit Suisse’s salespeople is no different. The bank said today that the global markets division will, “focus on its top institutional clients.” If these aren’t on your client list, beware.

6. Credit Suisse is focusing on equities sales and trading (even though it’s seriously under-performing here)

Everyone wants to be a big thing in equities sales and trading now, and Credit Suisse is no different. “The equities franchise is a core focus of our global markets strategy and we will continue to invest in it in order to grow revenues and market share,” said the bank today.

Unfortunately, there didn’t seem to be much market share growth in the first quarter. Credit Suisse’s equities performance was poor and on a par with Deutsche Bank’s. Only Goldman Sachs did worse.

7. Credit Suisse is cutting pay. But a greater proportion of pay will be delivered in cash in future

Lastly, Credit Suisse is hacking away at pay in its markets division.

In the first quarter of 2016, pay per head was CHF57k. In the first quarter of 2015, it was CHF73k. That’s a decline of 23%.

The good news is that Credit Suisse is on a mission to cut deferrals. You might get paid less, but you’ll get more of it in cash.

Photo credit: Tidjane Thiam by Africa Progress Panel is licensed under CC BY 2.0.

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