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Saturday, 01 November 2014

Gael force

Credit Suisse has bad news for debt wannabes

Credit Suisse’s fourth-quarter results contain bad news for fixed-income wannabes. The Swiss bank was among the first to adjust its debt-trading business to the harsher realities of new Basel III regulations, so it can probably weather the 28 percent quarter-on-quarter revenue drop it has just suffered in this segment. Other rivals may be less fortunate.

Fixed-income trading is a two-league competition. Goldman Sachs and the five balance-sheet “flow monsters” comprise the top flight with a combined market share of about 60 percent. Other banks - including Credit Suisse - are scrapping it out in the second division.

At this stage of the bank reporting season, there’s little to suppose that any of the second-tier fixed-income banks are closing the market share gap in a meaningful way. Fixed-income revenue at Morgan Stanley was down 44 percent quarter on quarter, a bigger fall than at the Wall Street banks in the debt-trading premiership.

Yet market share is only one way to view the fixed-income world. Credit Suisse, whose former fixed-income head Gael de Boissard was promoted to co-run overall investment bank operations, has spent the last year focusing on profitability. By its count, 80 percent of the 81 fixed-income business lines CS has retained made a return on equity last year of 15 percent under Basel III.

That may be down in large part to the beneficial conditions that prevailed last year for credit and securitised products. Negative real returns on government bonds pushed investors to seek yield on lower-grade debt, and as a result it was relatively easy for Credit Suisse to make a turn. By contrast, the environment was poor for interest rate and foreign-exchange trading, where scale players tend to overshadow Credit Suisse.

Nonetheless, the Swiss bank made the most of the conditions. In the third quarter of last year it made revenue on every day it traded, a cleaner record than at Goldman Sachs and JPMorgan. In the fourth quarter, it lost money on only two days, each time less than 25 million Swiss francs. That’s impressive though the bank also cut risk-weighted assets in fixed income by 31 percent over the year to $122 billion.

But market share is still one important indicator of fixed-income health. A quarter ago, Credit Suisse’s smaller size appeared no great barrier to revenue. After the precipitous 28 pct fall in the period just gone, second-tier rivals BNP Paribas, Societe Generale and Royal Bank of Scotland may fear that the good early news was a false dawn.

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Credit Suisse announced on Feb. 7 further cost cuts of 400 million Swiss francs, taking to 4.4 billion Swiss francs the reduction in expenses the group aims to achieve by the end of 2015.

Pre-tax profit at Credit Suisse in the fourth quarter was more or less unchanged on the previous three-month period, at 1.17 billion Swiss francs, excluding a charge for the fair valuation of the group’s own debt.

Pre-tax profit from investment banking activities fell 38 percent quarter on quarter, as improved advisory and underwriting revenue failed to offset dips in trading.

Revenue from fixed income sales and trading fell 38 percent to 887 million Swiss francs quarter on quarter, or by 28 percent once the exit of certain businesses were stripped out, according to analysts at Citigroup and JPMorgan.

The investment bank’s cost-to-income ratio was 88 percent in the fourth quarter. Management aims to bring this down to about 70 percent in the next couple of years. The division’s ratio of compensation to revenue stood at 43 percent in the fourth quarter, down marginally on the prior quarter.

Credit Suisse said that it does not “currently believe” that the group has “material issues” in relation to the Libor rate-setting scandal that has resulted in settlements and fines for Barclays, UBS and Royal Bank of Scotland.

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