The big day is fast approaching at Credit Suisse. Tomorrow, at an as yet unspecified time, Tidjane Thiam will make his presentation on the future of Credit Suisse. We don’t know what he’s going to say, but we’ve got a pretty good idea: there will be cuts to back office and technology roles and to some front office fixed income positions; jobs will be shifted to Asia; and private banking will be the new golden goose.
How did Credit Suisse get here? Unlike Deutsche, the Swiss bank doesn’t have a history of big strategic plans and big strategic reversals, but it has shaped its strategy to reflect the market. And the market hasn’t always been consistent.
Under ex-CEO Brady Dougan, Credit Suisse liked to summarize its strategy using bubble charts. Based on the past five years’ of fourth quarter charts, this is Credit Suisse has been up to – and what it’s likely to do next.
In 2009: Rates and commodities were it. M&A wasn’t
In 2009, banks were still emphasizing revenues above return and the bubble chart was configured to reflect this. Rates and commodities businesses were all the rage. M&A was in the doldrums.
In 2010: Rates and commodities dying, leveraged finance and emerging markets thriving
One year later, rates and commodities hadn’t lived up to their promise. Revenues in both businesses were falling. Emerging markets, leveraged finance and (maybe) equity derivative were the new new things.
In 2011: Bubble chart hiatus
Sadly, there was no bubble chart for 2011.
In 2012: Commodities and FX blacklisted. Global credit products and prime services were the new favourites
In 2012, bubble charts were back – but they were different. Now they focused on the new metric in banking, return on capital, which was plotted alongside market share. On these new measures, global credit looked good, as did prime services and securitized products. FX and commodities both looked very bad. Rates was falling out of favour.
In 2013: Global credit, cash equities and equity derivative were it. Prime services, emerging markets and global macro products were not
By 2013, commodities, rates and FX had become so unpopular at Credit Suisse that they were bundled into a new toxic business area, ‘global macro products’. Not only did Credit Suisse have a low market share in global macro products, but it had a low return on capital. By comparison, areas like global credit and cash equities offered high market share and high returns. Prime services and emerging markets were both areas of strength for Credit Suisse, but both generated low and falling returns.
In 2014: Cash equities, global credit products and securitized products looked good. Global macro was making a comeback. Prime services looked over-exposed
At the end of last year, Credit Suisse was strong in areas like prime services and emerging markets, where the return on regulatory capital is relatively low. It was less strong in investment banking, where returns are higher and the market has been booming.
In December 2014, Credit Suisse was also a market leader in global credit trading, which floundered in the months to follow. A lot of its capital was still tied up in global macro products where the returns were tiny and where its market penetration was poor.
In Q2 2015: Securitized products looked secure, along with cash equities and equity derivatives. Credit traders were on their way down
The final chart in the Brady Dougan bubble series helps underscore the issues facing Thiam as he attempts to restructure the investment bank.
Credit Suisse is very strong in securitized products, cash equities and equity derivatives, all of which generate strong returns and look fine.
However, strategists could be forgiven for questioning the bank’s commitment to prime services, which sucks a lot of capital and only provides low returns. They could also be forgiven for questioning the bank’s commitment to IBD (and to equity and debt capital markets in particular) given IBD business is using capital but not generating great returns. Global macro products professionals also look like they’re on shaky ground, despite the improving market conditions. And credit traders who looked fine at the end of last year are suddenly exposed as returns decline amidst difficult market conditions.
Seen through the parabolic lens of the bubble chart, it therefore looks a little like Thiam ought to be dumping prime services, global macro and credit professionals, along with a few investment bankers. In doing so, however, there’s a danger that he’ll damage some of the Swiss bank’s important revenue streams. And Credit Suisse’s IBD business might not endure another round of redundancies – the bank trimmed 60 of its most senior M&A bankers in 2012 and hasn’t been quite the same since.