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Credit Suisse is way too attached to its investment bankers

researchsnappy by researchsnappy
November 15, 2019
in Investment Research
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Credit Suisse is way too attached to its investment bankers
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There’s nothing wrong with clearing out some of your existing investment bankers and looking for some alternative, fancier ones. Just ask Greg Guyett, who said in September that he wants to hire some “better” bankers in his new job at HSBC. Credit Suisse could do with a similar resolution, but seems to be dragging its heels.

Today’s third quarter results for the Swiss bank show the restructured global markets business has been doing very well, while the (unrestructured) investment banking and capital markets (IBCM) businesss has been doing horribly. Average pay has been cut in both divisions even though Credit Suisse’s salespeople and traders surely deserve a rise. 

In the third quarter of 2019, the bankers at Credit Suisse’s IBCM division made a loss of CHF15m. This wasn’t an isolated event: in the first nine months as a whole, they made a loss of CHF102m. By comparison, Credit Suisse’s salespeople and traders made profits of CHF269m and CHF908m over the same period. 

The terrible performance of Credit Suisse’s investment bankers reflects ongoing problems in the bank’s M&A business. As the chart at the bottom of this page shows, while Credit Suisse picked up market share in equities and fixed income sales and trading in the first nine months of 2019, it lost market share in M&A in particular.

The poor performance of the IBCM division was already known: research firm Tricumen said in August that costs relative to income in the unit were unusually high in the first half. Curiously, though, Credit Suisse has done very little to cut costs in the business. During today’s call with investors, CEO Tidjane Thiam said the bank has “reviewed compensation accruals to take them down” and that it’s cut non-compensation operating expenses in IBCM 11% year-on-year in the first nine months. Clearly this was insufficient to stop that CHF100m+ loss.

Bankers have gone from ICBM, just not many of them. Credit Suisse now employs 30 fewer people in the unit, a reduction of 1% on the third quarter of 2018. Credit Suisse’s poorly performing bankers have also had a 7% pay cut, to an average of CHF300k for the first nine months of the year.

However, pay per head has also been cut in the out-performing markets division, where the average salesperson or trader is now on CHF150k, 5% less than last year – despite an excellent 2019.

This doesn’t seem fair. And Tidjane Thiam seems in no rush to jettison his underperforming bankers in order to better pay his outperforming salespeople and traders. The recent difficulties in the investment banking division are due to “cyclical variation,” said Tidjane today, adding that he was particularly pleased with the performance of the healthcare and technology teams where the bank appears to be adding staff. 

Not everyone is convinced. Jeremy Sigee, a European banks analyst at Exane questioned why Credit Suisse can’t just slash costs in its IBCM business in the same way an investment banking boutique would in the same circumstances. “Adjusted costs are moving very little compared to some big revenue swings,” said Sigee, adding that there would be, “much bigger alignment between costs and revenues in a boutique.” 

In response, Thiam said that IBCM is a “good franchise” and a “people business,” so costs can’t be taken down too much.  

This seems a question of interpretation: IBCM is a loss-making francise this year, and if compensation was reduced substantially, some of the existing people might make way for new ones who could help solve the problem.

Photo by Zachary Spears on Unsplash

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