Credit Suisses’s results are a mixture of very bad news and sort of good news: the situation looks fairly dire, but there are several upsides.
1. Bonuses in global markets have been cut by 36%
Credit Suisses’s investment bank is no longer a coherent entity. Whereas before there was just an ‘investment bank’, there is now a division called ‘global markets’ and another division called ‘investment banking and capital markets’. The first contains Credit Suisse’s sales and trading business. The second contains Credit Suisse’s M&A, ECM and DCM businesses.
Salespeople and traders at Credit Suisses’s global markets business are likely to be crying into their envelopes this week and next. During today’s call, CEO Tidjane Thiam said the bank has cut the global markets pool by 36%. This is a, “very, very significant cut,” as Thiam pointed out. Fortunately, however, it’s less than the 60% cut mooted in November.
2. But salaries in global markets have risen to (partially) compensate
Although bonuses fell by over a third in global markets last year, total compensation per head (salary and bonus) declined by a mere 6%, as follows.
There appear to be two reasons for this. Firstly, Thiam said salaries have risen. Secondly, Credit Suisse’s salespeople and traders will have benefited from the payment of bonuses deferred from previous years. The effects of this year’s big bonus cut will become more apparent in future.
3. Credit Suisse is deferring a smaller proportion of its bonuses
The other cheering news at Credit Suisse is that the bank is deferring less and paying more of its (reduced) bonuses in cash. In 2014, 48% of the bonus pool across the bank was deferred. This year, it’s down to 41%.
4. Credit Suisse’s M&A bankers had a great year in 2015
While UBS and Deutsche Bank’s M&A bankers had a horrible 2015, the performance of Credit Suisse’s M&A bankers looked more like Morgan Stanley’s or Bank of America Merrill Lynch’s, making Credit Suisse by far the best performer among the European banks. Promisingly, Credit Suisse said the M&A pipeline for 2016 is strong.
5. Pay for Credit Suisse’s IBD bankers is 70% higher than its markets professionals, but IBD bankers had a bigger pay cut in 2015
Now that Credit Suisse splits out pay and headcount in global markets and in investment banking and capital markets (IBD), we can see just how much it pays people in each division.
On a per head basis, the Swiss bank’s IBD professionals are far better paid than its markets professionals. This is almost certainly because there are fewer support staff in IBD.
However, Credit Suisse’s M&A and capital markets bankers had a greater pay cut in 2015. – 9%, compared to 6% in markets (which seems a bit unfair in light of the bank’s out-performance in M&A.)
6. Credit Suisse has done some big hiring in its investment bank
If you listen to Tidjane Thiam and CFO David Mathers and you read the headlines, you’d think Credit Suisse is slashing staff in its investment bank.
You’d be wrong.
In 2015, headcount across Credit Suisse’s investment bank increased. The bank said it made hires for compliance, risk and infrastructure, but didn’t specify how many.
7. But Credit Suisse’s salespeople and traders had a terrible 2015. And (more) cuts are coming soon
This does’t mean jobs are safe. Credit Suisse’s fixed income, currencies and commodities salespeople and traders had an atrocious 2015. Worryingly, so too did its equities salespeople and traders.
It doesn’t help that Credit Suisse’s macro trading business (which it cut a few years ago) is weak and that macro trading was the strongest area for most banks in FICC last year. Nor does it help that Credit Suisse is strong in high yield and emerging markets such as Latin America, where conditions were most challenging. And nor does it help that Credit Suisse made big mark-to-market writedowns on private label mortgaged back securities and leveraged loans, some of which were to the oil and gas and mining sectors. Worryingly, the bank admitted that there could be more of this to come in 2016.
Thiam said the priority for 2016 is to “reshape the global markets business”. Most of this ‘reshaping’ is likely to affect the fixed income business. In the presentation accompanying its results, Credit Suisse said the restructuring of its equities franchise was completed in Q4. In future, Thiam said the fixed income trading business needs to become more like an equities trading business. Right now, he said it’s still too big for the size of Credit Suisse’s investment bank.
8. Credit Suisse took a huge restructuring charge in its markets business, but even without this charge it still wasn’t hugely profitable
Thiam decided to bite the bullet in 2015. Credit Suisse took a goodwill impairment charge of CHF3.8bn, mostly related to its acquisition in 2000 of US investment bank Donaldson, Lufkin & Jenrette (DLJ).
CHF2.7bn of this was registered in the global markets division, which made a loss of CHF1.2bn as a result. However, even without this charge, costs accounted for 90% of global markets revenues.