Credit Suisse caught out by hefty trading positions

LONDON, March 23 (IFR) - Credit Suisse boss Tidjane Thiam only became aware in January of big adverse positions in the bank’s distressed credit book, prompting him to make more savage cuts to its markets business just three months after a strategic review.

Thiam, who became chief executive in June, said on Wednesday that he and senior executives only found out about the positions two months ago and since then he has been assessing them closely.

“In October I was not aware of the positions on that scale,” he told analysts. “There have since been changes in fixed income and accountability for that.”

Thiam said the misinformation on the distressed trades was “completely unacceptable” and showed “a cultural change” was needed. He said there had been consequences for staff involved, without providing further details.

Since October, market conditions have worsened considerably and unexpected credit losses have prompted Thiam to make more drastic action to shore up the Swiss bank’s global markets business.

Credit Suisse said it will close its global distressed credit and European structured product trading desks as part of a wider reworking of its first restructuring announced plan in October.

It will cut a further 2,000 jobs this year, on top of 4,000 cuts announced five months ago, of which 2,800 have already gone.

The bank expects to make a further 1bn of cost cuts to reduce its annual expenses to below US$18bn by the end of 2018.

Risk weighted assets in the markets division will be reduced by 30% to US$60bn from a previous target of US$85bn. Some US$10bn will be moved to the bank’s strategic reduction unit, or ‘bad bank’, which already had SFr65bn of risk weighted assets at the end of 2015.

Thiam said that beyond distressed, he would also seek to chop out other illiquid holdings in the trading book, such as certain collateralised loan obligation (CLO) exposures in Europe and the US, as well as derivative positions, even if the sale incurs losses.

“We have taken immediate action to reduce outsized positions in activities not consistent with our new strategy and systematically reduced our exposures. Writedowns were US$633m in 4Q15 and were lower in 1Q16 at US$346m as of March 11,” he said.

The markets business had its worst ever trading period in January, following on from an already weak fourth quarter. “Historically low levels of client activity and challenging market conditions has led to disappointing financial results,” said Thiam.

Since the end of the year, the distressed credit inventory has been reduced by US$800m to US$2.1bn and US CLO positions cut by US$500m to US$300m.

Thiam said he expected trading revenues across global markets in the first quarter to be 40% to 45% lower than in the same period a year earlier.

One insider at the bank said the restructuring had been accelerated by poor performance.

“If it hadn’t been such an awful Q1, it would have been a lot slower,” he said. “All of this stuff needs to be done in a negative environment which doesn’t help.

“The tree got too big and had to be trimmed.”

As well as closing the distressed credit and European structured product desks, Credit Suisse will no longer provide long-term illiquid funding and will shift its derivatives activities so they function across asset classes as a client-focused “solutions” business rather than a standalone unit.

FX trading will be moved into the Swiss universal bank unit set up last October, reducing the need to have two separate businesses doing the same thing.

Thiam said the partial IPO of the Swiss bank remained on track for this year. He also reemphasised his commitment to the Asia Pacific region and more capital-light businesses, such as wealth management and investment banking and capital markets.

The bank said it will also sell SFr1bn of assets this year, mainly real estate and smaller standalone businesses. It reiterated that after its capital raise last year it aimed to maintain a common equity Tier 1 ratio of between 11% and 12% on a Basel III basis.

In an update to the market, Credit Suisse said its investment banking unit revenues were lower in the first quarter compared with a busy year ago period.

The weaker performance came from lower levels of issuance in ECM and DCM, partially mitigated by higher M&A fees, which are roughly double those of a year ago. The bank wants to work more closely with investment-grade corporates having been stronger traditionally in the high-yield space. (Editing by Steve Slater and Ian Edmondson)