* Credit Suisse to scale back fixed income after worst start since 2008
* 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 rule changes.
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 balance sheets.
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.
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 SFr180m.
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 franchises.” (Reporting by Gareth Gore, Editing by Matthew Davies)