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Monday, 27 June 2016

Nip and tuck

Credit Suisse keeps on finding more costs to cut

Credit Suisse is used to leading the pack on cost-cutting. The Swiss bank has been ahead of its peers since last year, when it made the first of three announcements that will see it reduce expenses by a cumulative 3 billion Swiss francs before the end of next year. Like an over-eager surgeon, it’s at it again - opening the European banks’ results season by announcing another 1 billion francs of cuts by the end of 2015. But with unrelenting pressure for more capital, investment banking remains a tough business.

Being the first to move didn’t do Barclays any favours with its admission of Libor misdeed, but Credit Suisse doesn’t appear to have suffered unduly from taking the lead on cost-cutting. Investment banking, where Credit Suisse has already taken out about 1.7 billion francs in costs, has turned a corner. It was the main contributor to the group swinging to a pre-tax profit of 1.2 billion francs after a loss in the equivalent period last year.

Yet there are good reasons for the bank’s managers to remain unsatisfied. Revenue in equities sales and trading, while up on the year-ago period, fell 11 percent quarter-on-quarter to 1 billion francs. The group can also do more to buttress its capital cushion, after a slight slip since it outlined a year-end target in July. The bank now expects to have a Tier 1 capital ratio of 9.3 percent rather than 9.4 percent by the end of December. And the boost to the debt markets from central bank action over the summer may fade with time.

Hence Credit Suisse’s obsession with the other side of the ledger. Most investment banks aim for a cost-to-income ratio below 70 percent: Credit Suisse’s stands at more than 80 percent. Another problem is investment banking compensation, which rose 4 percent from last year. Headcount also needs to fall after remaining constant at 20,600 over the quarter, although it is down 7 percent since last year. With fixed income pruned, equities trading, capital markets and advisory will be in focus.

Presumably, the cost cuts of 1 billion francs, of which 700 million will come from the investment bank, will reduce both pay and payroll. The key question is whether yet more will be needed.

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Context News

Credit Suisse announced on Oct. 25 a further 1 billion Swiss francs of cost-cutting measures on top of those announced last year, taking the Swiss bank’s total savings target by the end of 2015 to 4 billion Swiss francs.

The group’s results for the three months to the end of September showed pre-tax profit of 1.2 billion Swiss francs compared to a loss in the same period a year ago, once losses for debt adjustment are excluded. Pre-tax profit was also up 9 percent on the second quarter. The gain was largely driven by an improvement at the investment bank, where revenue surged 66 percent to 3.3 billion Swiss francs versus the third quarter of 2011.

Fixed income sales and trading was the best performing business line in investment banking, with revenue rising 26 percent quarter-on-quarter to 1.5 billion Swiss francs and was almost double on the equivalent period last year. Equities trading revenue dipped 11 percent quarter-on-quarter - though up 15 percent on the third quarter of 2011.

Credit Suisse is aiming for a fully implemented Basel III Tier 1 capital ratio of 9.3 percent by the end of the year, assuming sales of Swiss real estate and an exchange-traded funds business are booked. That is slightly down from the 9.4 percent target it set in July.

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