Credit Suisse is the first major European investment bank to report its first quarter results. It's managed to keep the fixed income party going. Across fixed income sales and trading revenues were up 40% and in credit trading alone revenues were up 135% on last year (admittedly after a weak quarter in 2016).
The headline, however, is that Credit Suisse has launched a $4bn rights issue, keeping its Swiss division in-house and bumping up its tier one core equity ratio to 13.4% to bring it “in line with European peers”.
Is it all sweetness and light at Credit Suisse now? This is what you should know.
Within Credit Suisse there are at least two ‘Project Lighthouse’ cost-cutting initiatives that have stripped jobs out of its UK operation and continue to look into how to make its U.S. division more efficient, said CEO Tidjane Thiam today.
But headcount within Credit Suisse’s investment bank has been going up. It now has 3,210 people in its investment banking and capital markets division, an increase of 330 people since Q1 last year and 120 more than the end of 2016. Headcount in global markets is up by 70 people since the beginning of this year, but 180 have departed since the same point in 2016.
If this all seems a bit odd, considering that Credit Suisse cut 7,250 jobs last year and announced plans in February to reduce headcount by a further 5,500-6,500 in 2017, CFO David Mathers said during the analyst conference call that the focus has been on cutting back on contractors and consultants and “protecting our full-time employees” as much as possible.
Credit Suisse’s traders are not able to leverage as big a balance sheet as the markets divisions of other better-capitalised banks and CEO Tidjane Thiam admitted during the conference call that this had been “frustrating for the team” during the first quarter. Credit Suisse has had a target of $60bn in risk-weighted assets in its global markets division since 2015, and this quarter it hit $52bn. An increased CET1 ratio might make things easier in this respect.
Inevitably, Thiam and Mathers were asked about the impact of Brexit. Credit Suisse was reportedly considering Dublin as a location to relocate UK jobs. Mathers said that it “will have to look to increase clearing and transactions within the EU, but we haven’t decided where or what size”.
Still, because Credit Suisse reports in Swiss francs, the UK has become less of a drag on costs. Thiam said that the “weakness of sterling” has “substantially reduced our UK costs”.
Credit Suisse is not shy about paying its investment bankers and traders. Last year, bonuses were up by 6% despite feeble revenues, in an attempt to stop and exodus of staff. Costs ate up 99.2% of revenues last year in its global markets business. A 29% year-on-year uptick in revenues in Q1 has meant that the cost-income ratio stood at a mere 80% in Q1. Meanwhile, a 56% rise in revenues in Credit Suisse’s investment banking and capital markets business means that costs there consumed 74.4% of revenues in Q1, down from 108.5% at the same point last year.
Credit Suisse says that compensation costs increased in both divisions, largely because better performance meant it accrued more bonus expenses. But salary costs were lower and there’s less to pay out in deferred bonuses from previous years.
Still, on an average pay per head basis, Credit Suisse remains generous. In investment banking and capital markets, average pay was $108.4k in Q1 (up from $99.6k last year) and in global markets business pay averaged $59.4k, up from $56.9k in the first quarter of 2016.
Credit Suisse has reduced its presence in securitised products trading by shrinking its footprint in both Europe and the U.S. This was the big driver of the fixed income rebound at U.S. investment banks, and therefore the Swiss bank was expected to miss out.
In fact, the bank said that an increase in securitised products was the main driver of the 135% year on year surge in credit trading revenues. Specifically, in credit, an increase in leveraged finance issuance – especially in the U.S. – led to higher trading revenues there, it said.
Unfortunately, the same can’t be said for its equities revenues, which were down 13% year on year. Similarly, its ‘solutions’ business, which includes macro products and equity derivatives, was down by 24% year on year.
In terms of year on year increases, equity capital markets bankers at Credit Suisse managed to produce revenues that were up 134% year on year. This is second only to Morgan Stanley, which increased its ECM revenues by 144% in Q1.
Still, ECM revenues were particularly poor in the first quarter of last year, so the recent uptick in activity was always going to flatter the results. The big driver has been IPOs in the U.S, which reached $11.6bn in 26 deals in Q1, according to Dealogic, up from $1.2bn in 2016.
Equally impressive is a 64% uptick in debt capital markets revenues, fuelled by an increase in leveraged finance and investment grade debt issuance. Overall, DCM deals were down 6% year on year in Q1, according to Dealogic data.
In M&A, so far only Citi and Bank of America Merrill Lynch have managed any uptick in revenues year on year in the first quarter. Credit Suisse was down by 5% on the same point in 2016. M&A volumes shrunk by by 4% globally in Q1.
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