Credit Suisse has killed its markets business, except...
The salespeople and traders in Credit Suisse's global markets business didn't have a good 2016. Call it over-zealous cost cutting, or too much trimming of risk weighted assets (RWAs), or a lack of exposure to rising macro revenues, but the bank lost out. In revenue terms, Credit Suisse's trading unit had a terrible year. But there was a silver lining.
Credit Suisse's self-inflicted wound in sales and trading
BNP Paribas' fixed income traders excepted, all European banks' sales and trading businesses had a hard 2016. Credit Suisse, however, looked particularly challenged.
What went wrong? Why did Credit Suisse sustain an 18% reduction in fixed income trading revenues last year while U.S. rivals like J.P. Morgan achieved a 21% increase? The bank suggested it was entirely intentional, blaming "a decline in securitized products revenue" as capital and risk were cut. However, it's worth remembering too that Credit Suisse's fixed income trading business is like a man with only one leg: it's all credit following CEO Tidjane Thiam's decision to obliterate the macro team in the middle of last year. Macro (rates and FX) trading still happens at Credit Suisse, but it's tiny and is buried in the "solutions" business. As other banks rode the tide of rising rates revenues last year, Credit Suisse was therefore left on the beach.
What about equities, where only Deutsche outdid Credit Suisse in terms of revenue decline? Here, Credit Suisse said something about, "lower systematic market making revenues given low volatility," and, "lower prime services revenues as we resized our business model." The implication seems to be the systematic marketing making hedge fund Credit Suisse spoke about at its investor day is more important to its equities revenues than we thought. It's also worth bearing in mind that Credit Suisse has been jettisoning senior people in its equities business as part of 470 redundancies in its global markets business last year. And that management of the global markets business has been in a state of flux.
But, Credit Suisse's trading business has become super-efficient
There's one sense, however, in which Credit Suisse's global markets business looks much better than the rest: it's much more efficient at making use of risk weighted assets (RWAs).
Credit Suisse cut the RWAs allocated to its investment bank by 20% last year. This too will have made it harder for the bank's traders to generate revenues. However, as the chart below shows, traders at Credit Suisse now generate more than double the revenues of traders at Deutsche Bank and Bank and more than triple the revenues of traders at Bank of America for each dollar of risk weighted assets. That's pretty impressive.
Credit Suisse's traders won't get paid for their efficiency, and the unit faces further big cost cuts
Although Tidjane Thiam promised bonuses at Credit Suisse wouldn't be too bad this year at Davos, the overall compensation outlook in Credit Suisse global markets doesn't look too hot. Pay per head in the division fell 9% last year to CHF236k ($236k).
Credit Suisse literally can't afford to pay more. Costs ate up 99.2% of revenues in the global markets division in 2016: any further generosity to staff would have pushed the unit to a loss.
Thiam seems untroubled by this. Credit Suisse's CEO has a secret weapon: he said today that there are units of Credit Suisses's global markets business for which costs only amount to 20% of revenues, and that once volumes take off the bank will be fine. We strongly suspect that Thiam was referring to the systematic market making unit, which appears to be at the core of the bank's strategy nowadays.
This doesn't mean the cost cutting is over at Credit Suisse global markets. Costs in the unit were CHF5.6bn last year and Thiam wants them down to CHF4.8bn - a further reduction of 15%, Perversely, Thiam is still insisting that the restructuring in the global markets business is "substantially over," but his cost aspirations seems to suggest otherwise. The bank is hiring, however: Thiam said today that the bank wants to add headcount in equity derivatives in 2017.
Credit Suisse's investment banking division out-performed the rest last year
While Credit Suisse's sales and trading business had a harsh 2016, its investment banking division (IBD) had a fine time. In M&A , revenue growth was stronger than everywhere else. And in debt capital markets (DCM), it was stronger than everywhere but Goldman Sachs. In equity capital markets (ECM), revenues at Credit Suisse fell less than elsewhere. Even so, pay per head fell 11% last year to CHF400k ($400k).
Huge cost cutting and layoffs are still to come across the bank
Lastly, the big headline from today's Credit Suisse results was the bank's announcement that it's making another 5,500 job cuts across the bank after making a $2.4bn loss at group level.
These job figures aren't specific to global markets or the investment bank. Credit Suisse said the cuts will mostly hit contractors and consultants.
Even so, the new cuts should raise eyebrows in light of Credit Suisse's statement today that it also wants to reduce costs to CHF17bn by 2018. If this year's CHF880m of cost cuts are generating 5,500 new layoffs, the implication is that next year's CHF1.5bn of cost cuts could generate layoffs of another 10,000 or so. Scary.
Revised targets across Credit Suisse:
Source: Credit Suisse