Why Credit Suisse may not have to make big redundancies and UBS will

Fiona Swaffield, analyst at Execution Noble, has produced some interesting research comparing the flexibility of banks' cost bases and the amount of hiring they've done over the past 12 months.

As the table below shows, the big recruiters of recent times have been BarCap (16% y-o-y headcount increase from H12009 to H12010) and Credit Suisse (10% y-o-y headcount increase from H12009 to H12010). UBS and Deutsche have also been doing a bit of hiring this year, but the net effect compared to 2009 is expected to be neutral or negative.

Source: Execution Noble

Source: Execution Noble

Cost flex at Credit Suisse

However, while BarCap and UBS's cost income ratios have increased dramatically in 2010, Credit Suisse still appears to be cruising. Despite hiring more people since 2009 than UBS and BarCap, and despite continuing to hire this year, the CS investment banking cost income ratio has remained relatively stable at 71%.

Among the big European banks, Swaffield also contends that Credit Suisse is best placed to cut compensation costs without also cutting headcount. This is because a) Credit Suisse still seems to pay a high proportion of its compensation in bonuses rather than salaries and b) Credit Suisse continued to pay deferred compensation throughout the financial crisis.

This latter point is important because banks which cut deferred compensation during the crisis, only to reinstate it in 2009, face a big hump in their compensation costs this year as the first tranche of 2009 deferrals is paid.

This hump looks like a particular issue for UBS. UBS is already facing the highest cost income ratio (79.2%) of the big European banks. It's also increased salaries aggressively and has CHF1.5bn of bonus deferrals from last year to add into this year's comp costs. Unless revenues pick up, UBS will therefore have to make redundancies. Credit Suisse, on the other hand, may not.