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Middle of the pack

23 October 2014 By Dominic Elliott

Credit Suisse’s future is more workmanlike than its racy third quarter might suggest. The Swiss group revealed on Oct. 23 that its investment bank had trumped Wall Street: fixed income trading revenue leapt by a half year-on-year, against U.S. peers’ average mid-teens increase. But questions linger over Credit Suisse’s ability to maintain that performance if rates rise.

Credit Suisse’s quarter was a mixed bag. Its traditionally strong securitisation arm and emerging markets drove the third quarter rise in the investment bank’s top line. A 13 percent group return on equity is better than most peers. But wealth management revenue was flat year-on-year, with net margins falling once again to just 25 basis points.

A global shift from offshore to onshore private banking is hurting. A single client pulled 1.1 billion Swiss francs from its Swiss-based business during the quarter. Cross-town rival UBS has gained far more in overall assets since the pair hit crisis lows.

On the plus side, wealth management should pick up when rates do. A 1 percent parallel rate rise across developed markets would result in an additional 500 million Swiss francs in quarterly revenue at Credit Suisse, according to a person familiar with the situation. Less positively, tighter monetary policy typically spurs trading in interest-rate and foreign-exchange products, where Credit Suisse has hacked back. In bond trading, Credit Suisse doesn’t even make the top seven players.

As one of the few big investment banks not to be bailed out in the crisis, Credit Suisse could have been a market leader now. But in revenue terms it’s a top three player only in equities, where it has been losing market share to fourth-placed JP Morgan. And the bank aims to cut leverage in the business further, which may also suppress returns.

It’s fine to only focus on business areas where you can make a good return. And like UBS, Credit Suisse has rightly downsized its pre-crunch ambitions to be a bulge-bracket universal bank. But Credit Suisse trades on a forward 12-month earnings multiple of 9 times, versus 12 for UBS. Investors are saying UBS can manage the transition better.


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