Credit Suisse reveals a world of pain in the investment bank
First, the good news. Credit Suisse has not been slashing people in its investment bank this year: it's got 90 more employees than six months ago. Nor have people been leaving the bank as much as might be presumed from the reports of exits: Credit Suisse said its turnover rate is roughly the same as usual. "We have been investing in major hires across all divisions, including the investment bank," said CEO Thomas Gottstein this morning.
Gottstein said, too, that the investment bank has been "resilient", that Credit Suisse's big securitization business has been thriving, that combined equity and debt capital markets revenues were up, and that the M&A pipeline is "strong" and "up both sequentially and on a year-on-year basis." In a parallel universe where the $5.5bn loss relating to Archegos didn't happen, Credit Suisse's investment bank would have delivered a 17% return on regulatory capital in the second quarter of the year.
In the real universe, however, Archegos did happen and Credit Suisse's investment bank made a CHF76m loss in the second quarter. The return on regulatory capital was -2.4%.
While rival banks celebrated another strong quarter, particularly in M&A, equity capital markets and equities sales and trading, Credit Suisse's investment bank bled revenues almost across the board. Some of this was inevitable: the bank is resizing the prime broking business where the Archegos losses took place, and this drove equities sales and trading revenues 17% lower year-on-year, even when the Archegos loss was excluded. Some was not: M&A revenues fell by 37%, even as rivals' M&A businesses boomed. Fixed income revenues fell 37%, with emerging markets, macro and credit declines. Deutsche Bank's credit trading business thrived in the second quarter - but then Deutsche hasn't lost its top credit traders in the past year. Credit Suisse blamed its M&A decline on deal timing, but it may also have been related to the defection of some of its top M&A bankers to rivals in recent months.
Gottstein said Credit Suisse has been intentionally shrinking its investment bank. While Deutsche increased risk weighted assets in its investment bank by around 10% in the second quarter, risk weighted assets at Credit Suisse's investment bank were slashed. RWAs in the investment bank have been cut by $20bn since March and leveraged exposure is down $41bn or 11%.
All of this is feeding through to pay. Compensation spending in the division was cut 13% year-on-year in the first half (implying a 20%+ cut to bonuses). Both CFO Laurence Haddad and Gottstein said bonuses will be at the lower end of the range for 2021. Unless they're getting a retention bonus, Credit Suisse investment bankers and traders will almost certainly be paid down on last year.
Bonuses aside, however, the real question is what happens next. Haddad said deleveraging and cuts to risk weighted assets won't be repeated in the third quarter, but changes still look necessary. With a cost income ratio in the investment bank of 104% including Archegos and 78% excuding Archegos in the second quarter, costs at Credit Suisse's investment bank either need to come down or revenues need to rise. The new chairman António Horta Osório is busy concocting a three-year strategic plan that will be articulated by the end of the year. Staff at the investment bank need to hope that Horta Osório focuses on growth - although this might be easier said than done after the three months to June.
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