If you work in Credit Suisse’s London office, you have every reason to feel nervous. London is primarily investment banking. Credit Suisse will now be focusing on wealth management. London is a high-cost centre and the new strategy intends to strip out CHF3.5bn in costs.
Around 30% of employees are set to be handed their P45s.
Disaster. Or maybe not. Yes, the cuts are proportionally deep, but in reality Credit Suisse is merely accelerating offshoring of its support functions.
6,600 people work in its London office. 2,400 of these are in front office positions. Of the remaining 4,200 in the back office, 2,400 need to be “co-located” with front office staff in London. The rest – or around 1,800 jobs – will be shipped out to Credit Suisse’s Poland or India operations. At worst, CEO Tidjane Thiam said 2,000 London jobs could go or be off-shored. He added that there will be "some efficiencies" in the front office. The implication is that 200 front office jobs, or 8% of the total are also at risk.
In reality this means that 8% of front office jobs in the City could go as a result of the strategy shake-up. Meanwhile, a massive 43% of support roles will be shipped to lower cost destinations.
This is likely to be a chastening week for the City. If, as predicted, Deutsche Bank makes swinging cuts to its investment bank when it unveils its strategy announcement on 29 October, London is again expected to be badly hit.
Meanwhile, 1,600 people are also set to go from its Swiss headquarters, which houses 17,000 employees, but Thiam suggests this will be over the next three years and can be achieved by natural attrition.
Elsewhere, Credit Suisse has offloaded its US private banking business to Wells Fargo. This means 2,000 people will be offered the chance to move across in 2016, although it’s likely that some will lose their jobs in the transition.
So, London has been targeted, but of Credit Suisse's current 48,100 global employees it looks likely that 5,600 people, or 11%, will go in the short-term. This is not a bloodbath
Thiam insists the overall strategy, which will refocus the bank on wealth management and looks to tap emerging markets within that and raise around CHF6.05bn in capital, is not about cutting jobs. That said, he also added that he wouldn’t commit to a firm target on headcount reductions needed to have the “flexibility to react”.
This is what you need to know about Credit Suisse’s new strategy (and Q3 results).
Wealth management and private banking is the primary focus of Credit Suisse under the new strategy. So much so that even those in the investment bank need to cater to high net worth and ultra-high-net-worth clients. Private banking is not about schmoozing rich people, or “taking them out for lunch” as Thiam puts it.
Clients in the UHNW division are “very demanding” and what they want is long-term growth of their assets. Invariably, says Thiam, this demand is for investment banking services. Credit Suisse already has its Solutions Partners Group, where its often former investment bankers offer investment banking products to rich individuals using wealth management services. This is only going to be more important under the new regime.
The one chink of light for the London office is that, alongside Asia-Pac, Switzerland and Luxembourg, London will be built up as a hub for wealth management - and this implies closer links between investment banking and wealth management.
Anything that consumes capital is going to be a dangerous place under the new Credit Suisse structure. Prime services has been under pressure at most investment banks, but at Credit Suisse it’s particularly exposed and Thiam is right to scale back. Similarly, its global macro division is capital heavy and the bank is not a top five player in the sector.
Risk-weighted assets (RWA) are set to shrink by 72% in macro and 50% in prime services.
Most US investment banks posted declines in fixed income trading revenues of between 11-19% – the year-on-year revenue fall at Credit Suisse’s FICC division was 42%. The bank says that performance was particularly good in Q3 2014, thanks to strong performance in securitised products, but a rapid decline in credit trading combined with poor revenues in FX both added to the slide.
Rates traders did well, however. Any decisions on job cuts in macro are unlikely to be based on one quarter, but rates appears safer than FX currently.
Costs in Credit Suisse’s investment bank exceed its income. It slipped to a loss of CHF125m following a year-on-year 29% decline in revenue for Q3. Its cost-income ratio is 104% – up from 83.3% last year – and compensation accounted for 47% of this. But comp is actually down year on year – by 20% in Q3 and by 5% for the first nine months of 2015.
By contrast, headcount is actually on the up in investment banking. There are 700 more employees than in Q2, although this is the time of year when graduate trainees arrive, but 1,300 more than at this point in 2014.
This doesn’t exactly chime with the new focus on wealth management. Headcount in wealth management is up by 1,300 people year on year too, but there are actually 20 fewer relationship managers than in Q3 2014.
M&A bankers were the only advisory team to increase revenues year on year at Credit Suisse (although the bank doesn’t break this out), but debt capital markets revenues slipped by 37% year on year and equity capital markets by 45%.
In M&A, the US was the bright spot, but Credit Suisse still lost market share. Nonetheless, Thiam said that IBD was “core to serving clients” and that the equity division was still a priority.
The latter is performing well. Revenues were up by 12% in Q3 and by 14% year to date. Equity derivatives was the driver, while revenues in cash equities declined.
Given a renewed focus on costs, it’s no surprise that London should be singled out. Credit Suisse’s EMEA division posted a CHF262m loss in Q3, and is down CHF166m for the first nine months of the year compared to a CHF520m profit in 2014.
Credit Suisse wants to be where the rich people are. This means building its wealth management arm in Switzerland and also focusing on growth in Asia. Other targets are the Middle East, Latin America and Africa, but again this growth will be focused on wealth management.
Credit Suisse says it wants to be the “bank of choice for entrepreneurs” in Asia as wealth in the region is mostly in the hands of first and second generation entrepreneurs. It plans to more than double pre-tax income from CHF900m to CHF2.1bn by 2018.
Asia wasn’t immune to the slowdown at Credit Suisse in the third quarter though – revenues were down 11% year on year.
Specifically, it’s targeting 100 new people in risk management in Asia. And 1,000 new hires for its wealth management division. It's also refocusing its investment bank advisory on M&A and equity capital markets (ECM). From a hiring point of view, this means it's planning on hiring more managing directors in order to increase coverage.
Like Deutsche Bank, Credit Suisse is dispensing with the idea of having co-heads of its investment bank. It’s also separating out advisory and markets functions into two distinct global divisions.
While Colin Fan has been ousted at Deutsche Bank,Gaël de Boissard, the UK-based co-head of investment banking at Credit Suisse is on his way out. The other two former co-heads of Credit Suisse’s investment bank are retained. Jim Amine, based in New York, will head up investment banking and capital markets, while Timothy (Tim) O’Hara, again based in the US, will lead global markets.
The one very capital intensive area that in which Credit Suisse dominates is securitised products. Despite being capital hungry, it's return on regulatory capital has been increasing over the years. But year on year in the third quarter revenues in securitised products declined. There's no mention of a retreat from this business area, however.
Find out where Credit Suisse features in the 2016 eFinancialCareers Ideal Employer Rankings