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Credit Suisse's giant internal hedge fund - and other facts from the bank's investor day

It's Credit Suisse investor day. The bank's biggest and brightest are making a series of presentations throughout the day on the bank's future.

The big, predictable, news is: more cost cutting. Not long ago, Credit Suisse wanted to take out CHF2bn of costs. Now it wants to take out CHF4.2bn by 2018. The less predictable news is that Credit Suisse is starting to get real about Asia - instead of extolling the region's huge potential it's suddenly planning to make CHF300m of APAC cost cuts as revenues there haven't matched expectations.

As Credit Suisse restructures its investment bank, the presentations of Brian Chin and Jim Amine were the most interesting. The two men outlined the futures for Credit Suisse's global markets and investment banking and capital markets divisions respectively. This is what they said.

1. There's been a systematic trading hedge fund lurking within Credit Suisse's markets division 

If you want a trading job in an investment bank, you can't get much better than Credit Suisse's little known systematic market making group (SMG). In his presentation today, Brian Chin, head of the global markets division, described SMG as "a global quantitative and systematic trading group," which focuses on, "market making and high-turnover strategies," and which has a "history of making good returns."

Credit Suisse insiders say SMG was formed in 2011 as part of the bank's dedicated global Quant Equity trading hub. It is the descendant of what was formerly known as the Global Arbitrage Trading group which was restructured post the 2008/09 financial crisis. The fund operates, "highly sophisticated quantitative models," to manage its portfolio.

Credit Suisse's SMG unit is run by Paris-based Pierre-Yves Morlat and by New York-based Nick Branca.  Predictably, the division mostly employs quantitative traders. It's been hiring: Thibaut Chevalier joined from SocGen earlier this year, as did Saad Bahir. In October, Morlat and Branca were said to be prepping a quantitative hedge fund ('Qube') under the SMG umbrella, and to have already raised $800m in external funding. 

This might sound curious in light of the Volcker Rule, which bans banks from running proprietary trading desks or internal hedge funds, but the Volcker Rule only applies to U.S. banks and to European banks in the U.S, and in any case Credit Suisse has, in any case, rendered SMG compliant by moving it into its asset management unit.

As the chart below shows, SMG will now pursue its hedge fund-like activities differently. In the past, funding came from global markets (GM) and Credit Suisse's APAC business. In future, the funding for SMG will come from institutional investors too.

The evolution of Credit Suisse's most interesting trading division: 

Credit Suisse SMG

Source: Credit Suisse

2. Credit Suisse's sales and trading division has been crippled by cuts to its risk weighted assets, but it's all ok

Like Morgan Stanley's fixed income business, Credit Suisse's global markets division has had its wings clipped. As Chin's chart below shows, the bank has cut risk weighted assets (RWAs) allocated to global markets from $65bn to $58bn (11%). Revenues fell from $8.1bn to $5.5bn (30%) over the same period.

Credit Suisse seems ok with this: Chin said the bank's new fixed income revenue streams are less about trading and more about capital markets and origination. As such, they're less capital intensive and volatile. Nor is Chin troubled by the bank's serious slimming down in macro trading - an area where other banks are now making big revenues. The boom in macro trading is unlikely to persist, predicts Chin: interest rate volatility is actually "pretty low" and Credit Suisse's smaller macro business is now profitable and "nice and focused".

In future, Credit Suisse's ambition is to achieve $6bn in annual revenues in global markets, with $60bn of risk weighted assets.

Revenues vs. risk weighted assets in Credit Suisse's global markets division:

Chin's chart

Source: Credit Suisse

3. Credit Suisse says restructuring in the global markets division is over, but it wants to take out another $400m of costs by 2018

In a curious case of double-speak, Chin said the "bulk of the restructuring" in the global markets division is now done, and the division has "significant upside" from here on. At the same time, however, Chin wants to take another $400m (8%) of costs from the division by 2018. Is that not restructuring?

Ultimately, the bank wants to generate $6bn global markets revenues with $4.8bn of costs - a cost ratio of 80%, compared to 85% in 2015.

Most of the global markets cost reductions to date have come from "direct expenses", or cutting costs in the front office. Chin said. Net headcount, including permanent full-time equivalent employees, contractors, consultants and other contingent workers is down by 3,500 people, Chin added. This also seems strange though: Credit Suisse's third quarter results showed headcount in global markets falling by just 120 people in the previous 12 months. Has Credit Suisse kept its front office staff and cut over a thousand contractors? Looks like it.

Falling operating expenses in Credit Suisse's global markets division:

Credit Suisse cost cutting

Source: Credit Suisse

4. Compliance costs are crippling, but they've plateaued 

Credit Suisse has become the latest bank to broadcast the crippling cost of compliance. Between 2012 and 2015, compliance costs in global markets and the corporate centre rose from $500m to $900m. The good news, is that they've now plateaued. "There was a lot of upfront investment," said Chin.

Rising compliance costs in Credit Suisse's global markets division:

compliance costs credit suisse

Source: Credit Suisse

5. Future cost cuts at Credit Suisse's markets business will come from 'in-flight levers' 

Even though restructuring is over (it's not), Credit Suisse will be working some "in flight levers" to cut costs in its global markets in future. According to Chin, these are as follows:

Credit Suisse efficiency

Source: Credit Suisse

Basically, you don't want to work in a role where there's someone else doing the same thing in another area of the bank.

6. Credit Suisse is now going for some crazy returns 

When Tidjane Thiam first turned up at Credit Suisse in 2015 he was remonstrated for not providing a target return on equity at the bank. Not any more. Credit Suisse now wants to achieve a return on regulatory capital of 10% to 15% in global markets and 15% to 20% in investment banking and capital markets. The bank said it achieved a 15% to 20% RoE in its American investment banking business already, but this still looks very ambitious. Goldman Sachs and Deutsche Bank are going for 12% across their firms. What makes Credit Suisse different? Especially when you consider that global markets achieved a return of regulatory capital of 2.5% in the third quarter.

7. Credit Suisse loves its M&A bankers in the Americas and will probably be paying them well. EMEA, not so much

Four years ago, Credit Suisse took a knife to mid-ranking and senior staff across its investment banking division (IBD). In 2012, 30% of directors and 15% of managing directors were cut, thereby hollowing out the next generation of IBD talent.

The bank seems to have learned from that - or is, at least talking the talk with regards to its senior staff. In his presentation today, Jim Amine, head of Credit Suisse's investment banking and capital markets division, said it's "very, very important" that Credit Suisse keeps its senior coverage people happy. The bank has refocused its IBD division towards equity capital markets and M&A and has hired 25 senior bankers, distributed as per the chart below.

Credit Suisse is going for growth in American investment banking. Amine said margins are higher in the Americas and growth potential is greater. EMEA is a different story: as eurozone growth slows, Credit Suisse has been cutting costs in its European investment bank. Amine said the bank has cut its industry groups in Europe and merged them with its country coverage groups. In future, U.S. bankers will be providing industry-focused support across the Atlantic.

Where Credit Suisse has been hiring in IBD:


Credit Suisse IBD

Source: Credit Suisse

8. Credit Suisse is funding its senior M&A hires by cutting elsewhere 

Juniorization may be a thing at other banks, but Credit Suisse seems to be taking the opposite approach. In today's presentation, Amine explained that its $200m if spending on new senior hires and technology investments is being funded by streamlined support functions, cuts, and 'workflow engineering.' In other words, costs are being cut elsewhere in the bank to fund the hiring of all those MDs.

Self-funded growth at Credit Suisse's investment bank

Credit Suisse ICBC

9. Credit Suisse is going for robotics and machine-based learning

In his presentation, Credit Suisse CFO David Mathers said the bank is cutting costs by focusing on robotics and machine learning. As we've said before, this is increasingly looking like the future of finance. 

10. Credit Suisse has made more savings in London than expected 

Lastly, Credit Suisse is making some huge cuts to its London headcount. Mathers said today that it's now cut 4,200 people in London (out of 6,600 people when it started). That's a drop of 64%. Mathers added the bank's London costs have yielded more savings than expected. These are being reinvested elsewhere (think the Americas and Poland).


Photo credit: Credit Suisse by eflon is licensed under CC BY 2.0.

AUTHORSarah Butcher Global Editor
  • MM
    12 December 2016

    Quote from the article: If you want a trading job in an investment bank, you can't get much better than Credit Suisse's little. known systematic market making group (SMG). In his presentation today.

    All those applicants to Renaissance, DE Shaw, and 2 Sigma: CS is the future.

    Everybody, short machine-based learning algorithmic trading. CS is getting in.

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