In an inflationary environment, simply keeping costs stable is an effort - just ask Deutsche Bank, which has this morning jettisoned its 70% cost/income cost target in the face of rising inflation, and will now be targeting something in the low to mid-70s this year instead. Credit Suisse, however, wants to do some very heavy lifting: in the medium term, it wants to cut its adjusted operating costs by 8%, or by CHF1.3bn a year based on costs in 2021.
The plan was announced today, alongside a CHF1.6bn loss for the second quarter and a CHF1.9bn loss for the first half. Much of this loss came from the investment bank, which generated a CHF1.1bn loss in Q2 and had a Q2 cost income ratio of 195.7%. If Credit Suisse could get anywhere near Deutsche Bank's newly-flexed cost target, it would be a huge achievement.
Losses at Credit Suisse's investment bank in Q2 came from every angle. There was a $57m provision for credit losses; there were unrealized mark to market losses on the leveraged finance portfolio of $245m; fixed income sales and trading revenues fell 28% while most other banks experienced double-digit rises; CEO Thomas Gottstein, who is leaving for "personal and health-related considerations" said today that the exit of the prime services business continued to cast a pall and that the bank still has many of the expenses associated with that business but has lost "98% of the revenues."
Mostly, though, the problem in the second quarter was that net revenues across Credit Suisses's investment bank fell 40% year-on-year in the second quarter, while costs rose 18%. The bank said today that this was partly because of business mix: Credit Suisse has historically been stronger in credit, emerging markets and securitization, which were weak in Q2; it's been weaker in macro products, which were strong. Some areas did do very well though: advisory (M&A) revenues were up 44% on "significant deal closing" activity, even though they fell elsewhere; the equity derivatives business had its best second quarter in recent history.
Nonetheless, as Credit Suisse pushes to cut medium term adjusted operating costs to CHF15.5bn, down from CHF16.8bn last year, the investment bank will be at the forefront of the changes. The bank has appointed four board members - Michael Klein (ex-Citi), Richard Meddings (ex-Deutsche Bank, Barclays and elsewhere), Mirko Bianchi (ex-UBS, Deutsche, Unicredit etc), and Blythe Masters (ex-JPMorgan) to look at transforming the investment bank into "a less complex, capital-light, advisory-led and connected model." Precise details of the "bold" and "far reaching" changes will be released with the third quarter results. Chairman Axel P. Lehmann said today that they will "rigorously" going after the cost base, while Gottstein said they'll be "fundamentally reshaping the investment bank” and will have a "more focused markets business that complements the growth of the wealth management and Swiss banks business.” New CEO, Ulrich Körner, has been chosen to enact, “structural cost base transformation.”
While Credit Suisse's M&A bankers look safe in the new model, the future for credit traders and the securitisation business sounds more uncertain. Credit Suisse has come a long way since Brian Chin, former head of the securitised products group, ran the whole investment bank: revenues from securitisation business fell in the second quarter and there have been some significant staff exits, including Mike Dryden who quit for Sixth Street earlier this year. The bank said today that it's thinking of opening this business to third party investors, which might be a euphemism for selling securitisation books or even exiting securitisation altogether. CFO David Mathers wasn't drawn on precise plans, but said today that he's already received at least one approach from interested investors and that there's considerable interest in asset finance and private debt, which Credit Suisse can't entirely finance inhouse. Inviting third party capital will "maximise the potential of the franchise," said Mathers. Lehmann declined to comment on whether failure to attract third party capital will lead to the closure of the securitisation business altogether, but Mathers cautioned against presuming that there will be an exit from the business.
Credit Suisse's third quarter results and plan for the investment bank will be announced at the end of October. In the meantime, there are already signs that the bank is trying to stop key people leaving. - And those people are mostly in Asia and the US. Today's results refer to "deferred fixed cash compensation granted to certain employees in the Americas and Asia Pacific." Retention payments may need to keep rising: bonuses are likely to be dire (again) and losses mean that previous years' bonuses are likely to be clawed back (again).
It's not all about cuts, though. Gottstein said there's also investment and hiring. Credit Suisse will “continue to invest in relationship managers, in technology and in risk and compliance,” he said today.
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