Credit Suisse hiked traders' bonuses amidst horrible quarter

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Credit Suisse Q1

What went right for Credit Suisse's traders in the third quarter? Not much. What went wrong? Pretty much everything.

The Swiss bank reported its third quarter results today and in the global markets division they were a sight to behold. There was a CHF96m loss as costs exceeded revenues by nearly 10%. There was a 27% quarter-on-quarter decline in revenues, and the return on the regulatory capital invested in the business fell to -3%. And all this in a division which, at the last investor day in November 2017, was deemed to have been "successfully restructured." It seems there might be more to do.

Ok, so there were some bright spots. In equity derivatives, the bank said revenues were up 70% year-on-year in the third quarter thanks to collaboration with its International Trading Solutions (ITS) which exposes private banking clients to global markets solutions. It probably helps too that Mike Stewart, who was hired to run Credit Suisse's global equities business in 2017, is an equity derivatives specialist.

Elsewhere though, it was unremittingly bad, bad and bad again. In fixed income, all of the Swiss bank's best businesses seemed to be off-colour. - Securitization was affected by, 'significantly lower trading activity, primarily due to more challenging market conditions, which resulted in reduced client activity.'  Global credit products were affected by, 'lower leveraged finance trading activity' (even though Credit Suisse was growing its leveraged finance business last time we looked). And Credit Suisse's emerging markets revenues fell - blame Brazil. The only bright spot was macro trading, which is in any case a husk of its former self following cuts in recent years.

The woes are being heavily downplayed. In the presentation accompanying its results, Credit Suisse suggested its shriveled fixed income trading revenues were partly intentional following the "right-sizing" of its emerging markets business (equities and fixed income) and yet more trimming of macro teams. Adjusting for these effects, the bank said equities sales and trading revenues would in fact have have risen 6% year-on-year in the third quarter (instead of 1% as reported) and that fixed income revenues would have fallen 15% (instead of 27% as reported).

Even so, it's hard to downplay the bleakness of the past three months for Credit Suisse's fixed income traders. A fall of 15% would still put the bank's performance on a par with that of Deutsche Bank - which has its own excuses for shrinking in the form of the reduction in its U.S. repo business. At last November's investor day, Credit Suisse said it was aiming for CHF6bn in global markets revenues this year. That now looks out of the question - with global markets revenues down 9% in the first nine months, Credit Suisse will be lucky to replicate its revenues in 2017. Accordingly, CEO Tidjane Thiam - rarely one to acknowledge a mistake - said today that the revenue target has been delayed a year.

Until then, the good news is that Credit Suisse's traders will seemingly be paid higher bonuses despite the lamentable performance of the global markets division. Credit Suisse said today that "discretionary compensation expenses" for its salespeople and traders were higher in the third quarter of 2018 than one year previously. Equity derivatives traders are likely to be at the front of the queue.

Overall compensation spending in the global markets division was, however, lower as the bank spent less on salaries and less on paying bonuses deferred from previous years. The was despite the addition of around 500 new (and presumably very cheap) people (likely at graduate level and in emerging markets) in the past year. The implication seems to be that Credit Suisse's global markets division is hiking 2018 bonuses in the front office and squeezing pay everywhere else.

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