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Holding their own

24 April 2013 By Dominic Elliott

Two of Europe’s biggest investment banking firms have defied fears they would fall behind Wall Street peers in the first quarter. Credit Suisse and Barclays succeeded in maintaining revenue in investment banking year-on-year, against an average drop of 7 percent among U.S. peers. Costs fell too. Given their recent history, the decision by both banks to maintain sizeable investment banking operations is controversial. But the numbers provide some justification.

Ironically, both banks benefited from the strength of their U.S. franchises – a more pronounced advantage for Barclays and Credit Suisse than other European banks. Solid volumes in credit and securitised products helped both firms offset weakness in other areas of fixed-income trading, such as rates. Diversity, across products and geographies, helps.

Barclays still lags its Swiss rival in adapting investment banking to the post-crisis world. A 500 million pound charge that dragged down Barclays’ group profit will be repeated later this year. But Credit Suisse’s first quarter shows it is possible to reshape and resize investment banking and still make a quarterly return on equity of 23 percent under Basel III. While the start of the year is traditionally the most lucrative period, Credit Suisse’s annual target of 15 percent ROE in investment banking is looking realistic.

Why, then, have the shares of Credit Suisse performed almost exactly in line with UBS since the latter revealed bold plans to exit investment banking last October? Because it takes years to win credibility for achieving the right risk-reward balance in investment banking. In the meantime, wealth management will be the stronger share-price driver. And in the first quarter, private bank and wealth management pre-tax margins fell to 26.7 percent quarter-on-quarter, reflecting low interest rates globally and slower progress on costs.

Barclays needs its investment bank to emulate Credit Suisse’s returns – not least as the rest of the UK group is dominated by low-growth, low-margin retail banking. A 19 percent rise in equities trading revenue looks positive, but Barclays’ near-miss with a mishandled block trade in Dutch telecoms company Ziggo could have ruined the result.

Restructuring is paying off at Credit Suisse. If Barclays were to pull off a similar trick, the UK bank’s shares should start trading in line with its book value like Credit Suisse’s, rather than 30 percent below as they do currently.


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