Credit Suisse reported its third quarter results yesterday. As we noted at the time, they weren't great. The bank's share price has fallen around 4% since the announcement, despite CS's promise to dramatically improve its return on equity.
Now that Credit Suisse's results have percolated across the analyst community, this is what you need to know about their implications for jobs across the banking industry as a whole.
Credit Suisse is moving much of its rates business into a 'non-strategic unit.' In the first nine months of this year, CEO Brady Dougan and CFO David Mathers said the non-strategic rates business generated negative revenues of CHF-30m. The rates business was a drag on profits, it was a drag on returns, and it needs to be partially put out of its misery. Were it not for the under-performing rates business, Dougan and Mathers said Credit Suisse's investment bank generated a healthy 23% return on Basel III capital for the first nine months of the year instead of the 13% that was reported.
As a result, Credit Suisse is cutting the risk weighted assets attributed to its rates business by 40%. It wants to cut an additional CHF100m annually in costs from the investment bank with rates as the focus - implying that around 350 rates jobs could go (given that CS investment bankers are on track to earn CHF272k this year and around 50% of costs are allocated to compensation.)
Rates traders clearly have reason to be fearful, but it's worth noting that Credit Suisse's rates business is a special case. As the chart below (taken from a JPMorgan note published earlier this month - before the Q3 results were out (click to enlarge) shows, Credit Suisse's rates business is far small than rivals'. This year, it's only expected to generate $0.8bn of revenues, versus $2.5bn at Goldman and Barclays and $2.6bn at Deutsche Bank.
Credit Suisse's rates business was simply too small to compete in an environment where regulatory costs are rising. Which other rates traders should be worried? SocGen and Morgan Stanley also look exposed. "The exit from Rates is strategically smart; we agree with management that Rates is set for fundamental change and reduced revenues, so scaling back makes sense," said analysts at Deutsche Bank. Other banks may yet decide to follow Credit Suisse's example.
Credit Suisse is the first European bank to report its third quarter results. As Deutsche Bank analysts point out, it has significantly under-performed all the U.S. banks which declared their results last week, in all areas.
Senior M&A bankers should never be made redundant. If they are, the deal pipeline will run horribly dry.
Has this happened to Credit Suisse? Last year, it cut senior investment banking staff by up to a third. This year, its advisory, ECM and DCM businesses have performed peculiarly badly (see chart above).
So far this year, Credit Suisse has cut compensation at its investment bank by 24%. In total, analysts at JPMorgan are predicting that personnel spend in the business will reach CHF5.1bn for 2013, down from a peak of CHF8.7bn in 2009.
Guess what, however? It's not enough. However fast Credit Suisse cuts pay for its investment bankers, non-compensation costs keep rising to eliminate the savings. Litigation expenses were a problem in the third quarter, when expenses rose to a dangerous 91% of revenues (see chart below from Deutsche Bank).
Once Credit Suisse has trimmed its troublesome rates business, it says it will be able to make a 23% return on Basel III equity. As analyst Chris Wheeler points out, this is a lot higher than the 15% return on equity promised by UBS after its restructuring is over. Credit Suisse has just significantly upped the ante. Now is really not the time to be working for a business which generates very low returns.