* Credit Suisse to scale back fixed income after worst start
* Global macro desk to be the most affected
(Updates to add details of October restructuring in the rates
business; good performance of securitised products)
By Gareth Gore
LONDON, April 16 (IFR) - Credit Suisse has concluded that
deeper cuts to its fixed income franchise will be needed over
coming months, with management finally bowing to years of
pressure to scale back in the area after revealing that the
business suffered its worst start to the year since 2008.
The global macro products desk, which houses the Swiss
bank's rates, foreign exchange and commodities offerings, is
likely to face the brunt of any cuts, with continued low
interest rates across the developed world and new regulations
dramatically reducing client trading volumes and profitability.
"We are focused on reshaping the macro business to improve
returns, and that means refining the range of products that we
offer to clients and reducing the cost base of the business,"
said Lara Warner, chief financial officer of the firm's
investment banking business. "Given client volumes continue to
decline, it makes sense to rethink the amount of capital that we
allocate to this business."
The bank last October outlined plans to restructure its
rates business to increase returns, saying that it would reduce
capital-intensive structured rates activity. But fixed-income
operations continue to suffer, mainly in the macro business.
Fixed-income sales and trading revenues slumped to SFr1.49bn in
the first quarter, down 25% from a year earlier, representing
the worst start to any year since 2008.
Cuts to the macro business at Credit Suisse come after Swiss
rival UBS abandoned large parts of its fixed income franchise
last year, but put the bank at odds with US institutions such as
JP Morgan and Goldman Sachs which have in recent days said they
expect demand for fixed income activities to rebound.
"We normally have a very strong first quarter in the global
macro business, but that didn't happen this year," said Warner.
"There are certain temporary factors such as the geopolitical
situation and the low rate environment, but the business is also
facing deep structural change."
"The global macro business faces substantial new rules on
additional capital and leverage buffers, and is also going
through a period of immense technological change with many
products having to be cleared or going through swap execution
facilities," she said. "It is very difficult to determine the
shape of the macro business going forward because we don't know
how clients will respond."
Like many of its peers, Credit Suisse is under pressure to
cut its balance sheet to meet new leverage rules. It unveiled
plans to wind down SFr123bn (US$140bn) of non-strategic
exposures last year, but analysts warned more cuts might be
necessary because it is among the banks most affected by the
Credit Suisse bosses have come under intense pressure from
shareholders and analysts to scrap much of the bank's fixed
income franchise. They have resisted pulling out of large areas
of fixed income, opting instead to improve capital efficiencies
and reduce costs.
Fixed income - and especially rates - is extremely capital
intensive compared to other businesses such as equities trading,
underwriting and advisory, meaning that the asset class is often
targeted by banks that need to quickly rein in the size of their
The bank acknowledged in its latest results presentation
that its global macro products franchise had lost ground in the
first quarter, admitting that the business now had a market
share of number seven or lower. The unit also has had the lowest
return on capital of all its strategic businesses, according to
the bank's calculations.
Not all of the Swiss bank's fixed income businesses are
suffering, however. The firm said that its securitised products
and credit operations, which have much better returns on capital
and which boast much better market shares, continued to gain
ground in the first quarter.
DIFFICULT IN EQUITIES
The bank also had a difficult quarter in equities, which it
had hoped would make up some of the drop-off in fixed income.
Revenues there slumped 7.4% from a year ago to SFr1.20bn,
although that was a substantial improvement on the previous two
quarters. The emerging market sell-off during the quarter hit
results, but bosses believe that this should only be temporary.
"We need to look beyond the equities numbers to understand
the industry backdrop," said Warner. "There was some turmoil in
markets in the first quarter, especially in emerging markets. We
don't think these are secular issues for equities. Indeed,
outside of emerging markets many aspects of our equities
franchise, such as derivatives and prime services, are
performing really well."
Underwriting fees certainly held up well. Debt underwriting
fees climbed 1.5% from a year ago to SFr468m and equity
underwriting rose 17% to SFr183m. Advisory rallied 24% to
The bank will continue to shed assets in its non-strategic
division, with the aim of reducing its leverage exposure by
about two-thirds by the end of next year. Capital freed up will
likely be re-employed at group level and in the private bank,
according to Warner.
"We are going to focus on reducing the non-strategic part of
the investment bank so that the strong performance in the core
business will be a larger determinant of the results," she said.
"We will continue to support and invest in our leading
(Reporting by Gareth Gore, Editing by Matthew Davies)