GlobalCapital knows that what matters to markets is how reality turns out compared to explanations. But we still have trouble explaining to non-finance friends how making a Sfr5bn loss one year and then a Sfr2.5bn loss the next can make a stock go up.
It’s a measure of just how dire market expectations had become (and still are) for Credit Suisse that this is exactly what happened. The bank needs to convince the market that it has enough capital, and that it has a coherent strategy. Investors will tolerate the losses and the miserly distributions if they can be confident that Credit Suisse has a plan to come out the other side.
On the basis of Q4, it might actually work. The bank has sold off the assets in its bad bank quicker than expected, getting rid of European mid-market loans, emerging market corporate loans, and macro derivatives (some went back into global markets, thanks to approval for a model change).
Capital levels came out better than the market expected, raising hopes that Credit Suisse can organically cover its capital shortfall. It’s already better capitalised than many of the European firms, at 11.6% after its RMBS settlement with the Department of Justice, but the Swiss regulator wants its two global banks to have higher levels than any other country, so there’s still a hard grind ahead.
But with January revenues in credit and securitization, CS’s best fixed income business lines, up more than 100% from January 2016, and a 90% jump in investment banking, the backdrop is looking good. By percentage, too, it knocked it out of the park on DCM, which was up 65% — though this was apparently because of some underwriting mark-to-market losses in 2015, rather than a stellar 2016 (GlobalCapital suspects tech-focused bridge loans, such as the Dell-EMC acquisition financing, of being the culprit).
Nonetheless, the environment now might even be good enough to shelve the planned IPO of the Swiss Universal Bank (SUB), the firm’s “jewel in the crown”, according to one Swiss corporate financier. This was supposed to raise Sfr2bn-Sfr4bn of capital in the second half of 2017, but perhaps its function all along was simply to assure investors there was, in extremis, another source of capital. After all, the downsides to selling were considerable.
Firstly, it works very, very well. It’s a consistently profitable, high margin business with oligopolistic levels of penetration across the Swiss market. Why wouldn’t Credit Suisse group want to keep it all?
Then, there are the operational problems. Credit Suisse needs a Swiss retail subsidiary for its resolution planning, but the universal bank has wealth management and investment banking in as well, both unarguably global businesses. Revenue attribution would therefore be even more fraught than usual.
Did the Swiss franc bond mandate land because of relationships in its investment banking and capital markets divisions?Competitive swaps pricing from the global markets business? Or because of the Swiss franc origination team in the SUB? If outside investors are getting a piece of the risk and reward, the bank had better have tip-top internal accountability for such things.
In other Swiss bank news, UBS seems to looking at cuts, with several recent hires now at risk. Will Barter, head of UK investment banking (joined 2014), Chiel Ruiter, head of corporate client solutions for the Netherlands (joined 2015) and Melanie Czarra, co-head of corporate DCM and client solutions EMEA (joined 2015) have been names mentioned, though GlobalCapital understands there is no formal redundancy “round” — each situation is idiosyncratic.
Investec seems similarly afflicted — it hired Florian von Hartig, an experienced emerging markets originator,to run DCM at the beginning of 2015, before deciding, early in 2017,to cut emerging markets bonds to the bone, with the loss of more than 10 jobs in DCM, syndicate, sales and trading. Investec wasn’t the biggest shop, but it had a few strengths, such as a deep connection to its South African home market, strong wealth management, and capable retail distribution.
Von Hartig was supposed to drive its EM presence into other geographies – more of Africa, India — but it’s not like the bank could have really judged success or failure by this point. With six months to get his feet under the table and set up the business, plus a year or eighteen months to start doing some lending, the first bond mandates, if they were ever to arrive, should start showing up about now.
Anyway, the week ahead brings more joy still for bank turnaround cognoscenti. The newly invigorated HSBC reports on Tuesday, followed by Barclays on Thursday, and RBS and Standard Chartered on Friday.