By David Henry and Katharina Bart
NEW YORK/ZURICH Oct 14 In spring 2009, senior
Credit Suisse executive Gaël de Boissard told
colleagues at a strategy meeting that as the bank reshaped its
bond trading business, they needed to remember the five stages
of grief outlined decades ago by psychiatrist Elisabeth
Denial would come first, followed by anger, bargaining,
depression and finally acceptance, he said.
"It is hard to be present in every business line in a world
where capital is expensive. You have to make some choices," de
Boissard, now co-head of the Credit Suisse investment bank, said
in an interview.
Credit Suisse has been among the most aggressive banks in
paring back its fixed income, currency and commodities trading
business after the financial crisis. The Swiss bank winnowed
down the 120 product areas it traded in to around 80, through
consolidating some businesses and exiting others altogether.
With Credit Suisse's strategy now well set, it could be a
template for other European and U.S. banks that are under
increasing pressure from regulators to cut risk-taking, bank
Banks are being squeezed on at least two fronts. Revenues
are down by a third since 2009, but funding costs are higher
because regulators are forcing banks to rely less on cheap debt
to finance themselves, said Philippe Morel, a consultant at the
Boston Consulting Group.
The big banks cannot respond by buying one another - the way
companies in the steel, auto and pharmaceutical industries have
done to reduce excess capacity - because regulators do not want
banks to get any bigger, Morel said. The only real option left
for most major banks globally is to voluntarily shrink to be
sufficiently profitable, he added.
Credit Suisse did not have a choice. The Swiss government,
which was shocked by the near-collapse of UBS AG in
2008, moved earlier and more forcefully than other regulators to
require banks to rely less on debt funding and more on equity,
which can cushion them better against losses.
Even though Credit Suisse navigated the financial crisis
relatively well and received no taxpayer bailouts, executives
felt they had to face up to new rules and weaker revenue, and
start cutting. They focused on slashing areas where their market
position was weak and the capital requirements were high, such
as commodities trading.
If they did not make changes, Credit Suisse executives
determined that the investment bank's return on equity, a
measure of the returns they wring from shareholders' money,
would have fallen to 10 percent from 19 percent, an unacceptably
low level. With the changes, they aim to get returns closer to
So far, the efforts have paid off - Credit Suisse's
investment bank posted a return on capital of 18 percent in the
first half of the year, as revenue increased 9 percent, helped
by businesses including fixed-income trading.
"Credit Suisse moved very quickly, to their credit," said
analyst Chris Wheeler of Mediobanca. "They're getting much
bigger bang for their buck," he said.
There are risks to Credit Suisse's strategy. Businesses that
the bank exits may come roaring back, and businesses that it
stays in may produce less profit than expected. What's more,
rivals with weak hands may be slow to fold, reducing
profitability for everyone else, analysts said.
UBS AG last year gutted much of its fixed income business
and announced it was eliminating some 10,000 jobs.
The move included closing its distressed-debt
trading desk, which would require a lot more capital under new
UBS is encouraged by the results so far, a company
So far, stock investors seem to be as well. Since the day
before Credit Suisse announced the acceleration of its
contraction plans in 2011, UBS shares have gained 65 percent,
more than four times the 14 percent rise in Credit Suisse
But rivals say they are more likely to follow Credit
Suisse's strategy, which has been more surgical. In 2009, the
bank set its initial course and disposed of businesses that most
obviously would do badly in the new environment, such as trading
with the bank's own money, and European commercial mortgage
In November 2011, the bank cut deeper. It slashed capital
for interest-rate and foreign exchange trading by 60 percent. It
rushed out of low-revenue trades that ate up a good deal of
capital because they were not backed by collateral and matured
in 10 to 15 years, or more.
It looked closely at potential profits in businesses where
it was long a laggard. In commodities trading, it ranked in the
bottom tier among global banks. Consulting firm McKinsey said
then that across Wall Street, the return on equity in
commodities was poised to fall from around 20 percent pre-crisis
to around 8 percent after new regulations are fully implemented.
Some decisions were particularly hard. De Boissard remembers
the grief inside the bank, when his team could not offer a
derivative to an Australian company that was looking to borrow
in Swiss francs but pay its debt in Aussie dollars.
"You'd miss a big trade with a client and you'd naturally
get people questioning whether we were doing the right thing,"
Some people in the bank were reluctant to adapt, de Boissard
said. "I remember saying to people if you are not good at
change, this would be a good time to get off of the platform."
But from the end of September 2011 through the end of
September 2012, the company slashed risk-weighted assets, a key
indicator of capital needs, by 43 percent in the fixed-income
section of the investment bank. The moves, which included
distributing some risky assets to employees as part of their
compensation (a tactic Credit Suisse had used early in the
crisis) almost immediately lifted returns.
In the first half of 2012, the investment banking segment of
the company reported a return on regulatory capital, known as
Basel 3 capital, of 12 percent compared with 8 percent a year
Those returns have edged higher since then, as the company
continued shifting assets, although gains at this point are more
Rivals have already shown signs of following Credit Suisse's
Deutsche Bank AG is in the process of deciding
which businesses to continue after concluding that it must purge
as much as 250 billion euros of assets, or 16 percent of total
assets after adjusting for items like derivatives, to meet new
bank safety rules.
JPMorgan Chase & Co is tuning up its business,
albeit less radically. Ita decided in July to sell its physical
commodities business after concluding profits were too slight to
justify the demands the company would face from regulators to
keep it. In September, JPMorgan said it will
quit making loans to students.
Morgan Stanley has stepped back from many areas where
it was once a big player, including trading secured bonds known
as asset-backed securities, in favor of standardized products
that trade on exchanges and require the bank to hold much less
Many banks are unsure how many businesses may come roaring
back as the economic cycle improves, and how many are
Industry analyst Brad Hintz of Bernstein Research sees banks
fighting "a war of attrition over the next three to five
years," in their fixed-income trading businesses, he wrote in a
report in September.
Another risk is that too many banks will all concentrate on
the same businesses, squeezing out profits.
For example, competition is increasing in processing
businesses, which require little capital because they entail
moving money around the world for companies, governments and
Outside of fixed-income trading, wealth management could
feel its profits squeezed. Credit Suisse plans to commit the
same amount of capital to private banking and wealth management
as it does to investment banking. Right now, it applies less
than two-thirds as much capital to its private wealth business.
The bank's chief financial officer, David Mathers, brushed
aside those concerns on a conference call with investors last
month. When asked if profit in private wealth management would
fall, he said that customers care more about good service than
rock-bottom costs, so the business would continue to be