Credit Suisse's crippling cost squeeze, shown in charts by Deutsche Bank
It's not over at Credit Suisse. The Swiss bank's investor day is coming on Wednesday. Another round of cost cutting at the bank's global markets business is expected.
If you work at Credit Suisse, cost cutting is nothing new. The bank has been taking costs out of its global markets business ever since CEO Tidjane Thiam announced his strategy in October 2015.
However, there are signs that the Swiss bank's enthusiasm for extracting costs from its sales and trading operation is damaging the franchise. As the chart below from analysts at Deutshe Bank shows, Credit Suisse's equities and fixed income sales and trading (S&T) businesses have both lost significant market share since Thiam's arrival.
Credit Suisse's declining sales and trading market share:
Thiam-watchers might argue that this is deliberate. Under its new CEO, Credit Suisse has been pulling back from capital intensive fixed income businesses and focusing on delivering returns. In the circumstances, declining market share in fixed income currencies and commodities (FICC) trading is to be expected.
This is true - except that FICC businesses at other banks have seen some of the strongest growth this year and are expected to see some of the strongest growth again in 2017. As fixed income rebounds, therefore, a weakened Credit Suisse is missing out.
The real question, though, concerns Credit Suisse's equities sales and trading business. Here, falling market share isn't part of the plan at all: in a call accompanying the bank's third quarter results in November, Thiam said equities is an "integral part" of the bank's strategy and that the bank plans to invest in "technology and talent" to drive its equities revenues higher. Higher equities revenues will crucially help drive down the unmanageably high cost ratio of 95% in Credit Suisse's global markets business in the third quarter, Thiam added.
This looks like wishful thinking. 2017 is broadly expected to be a good year for fixed income revenues. Even if Credit Suisse's equities sales and trading revenues were to increase 10% on their level of the third quarter (unlikely, given that equities revenues are falling), the bank would still be left with a cost ratio of nearly 90% in its global markets division, all things being equal. This would be higher than both Bank of America and Deutsche.
Thiam and CFO David Mathers have one other option: to further cut costs, at the risk of further damaging the markets franchise and worsening the existing feedback loop. Thiam already alluded to the never-ending cost cutting phenomenon in September. Even though previous cost target of CHF4.5bn had been met, costs needed to be driven down further, said Thiam; CHF4.5bn was now only the breakeven point; more needed to be done if the markets business were to generate strong returns.
Deutsche Bank's analysts are expecting Thiam to ramp up cost cutting in the global markets business on Wednesday. As the chart below shows, they're expecting Thiam to propose taking out CFH3.4bn to CHF4bn of costs from across the bank by the end of 2018 - up from CHF2.bn originally. CHF2bn of these cuts are expected to come in global markets (IB) and investment banking and capital markets (ICBM), up from CFH400m originally.
If you work in Credit Suisse's markets business, 2017 will likely be another year of restructuring. The bank needs to hope its top staff bear with this: it needs to stop the cycle of cost cuts leading to falling revenues, leading to further cost cuts, if the markets business is to have a future.