P&M Notebook: CS, DB - where’s the good news?

Most of Credit Suisse’s loss, admittedly, is a goodwill writedown from the acquisition of Donald, Lufkin & Jenrette 16 years ago. Substantial restructuring and litigation costs didn’t help either.

But even stripping these out, the underlying businesses didn’t do well. Fixed income trading was down a terrifying amount, as mark-to-market losses on high yield debt and leveraged loans flowed through the P&L. Equity trading was also well down, thanks to Latin America and “fund-linked products” (me neither).

For fans of good bank reporting though, Credit Suisse was a treat. For a start, the bank broke up debt underwriting and equity underwriting into markets and banking. These businesses, as they are at many banks, are joint ventures between investment banking and trading, using personnel from both sides, and splitting profits and loss.

Yet nearly every bank stitches them back into “investment banking” for quarterly reporting. Bank of America does this, then tries to break the businesses back out again with footnotes of baffling complexity. No other major bank bothers to acknowledge the revenue split at all.

Admittedly, showing the split in the capital markets JV adds confusion of another kind. What is one to make of Credit Suisse’s admission that the “markets” portion of debt capital markets was up 10%, but the investment banking side was down 22%?

Other delights abounded. Breaking out Swiss investment banking and Asian investment banking is obviously self-serving (the bank is supposed to be pivoting to Asia, and prepping a partial IPO of its Swiss unit) but gives excellent colour.

And the deep dive into the shape of Credit Suisse’s levfin commitments was helpful — though tantalising. It’s reassuring that only 3% of its commitments are energy, but one can only wonder about the 56% in “computers and electronics”.

GlobalCapital is going to hazard a guess that Dell and EMC might be a chunk of that, with hopefully not too much related to bridging for the botched Veritas LBO. Anyway, it was unprecedented disclosure for an investment bank, and shows off the grasp of granular-level detail Tidjane Thiam demonstrated so ably in the October strategy update.

For Credit Suisse bankers though, a chief executive with a fondness for detailed disclosure (rather than grim aphorisms) isn’t much comfort, even if he has agreed to ditch his bonus. The bank is also bringing forward its cost-cutting programme, the main feature of which is 4000 job cuts, many of them in London.

Bonuses are down 36% in Markets, according to the investor presentation. Most of the decline might be zeros for the bankers and traders being encouraged to rethink their employment, with everyone else coming out ok, but it’s hard to tell from this vantage.

Meanwhile, over at Deutsche Bank, GlobalCapital is sorry it had the temerity to point out the bank had cut risk in leveraged finance. Last week, as the bank reported a 53% drop in DCM revenue, it offered cuts in risk as the reason. Credit Suisse, however, appears to have lost money because it….didn’t.

Deutsche did dodge Veritas, and did dodge much of the spread widening, and is now making rumblings about being in a better position to offer financing this year, for the “coming wave of LBOs”.

That certainly sounds like a good way to run a business, but GlobalCapital will only note a certain disposition to optimism about future volumes, particularly among members of the sell-side just before bonus season.

Staying on leveraged finance, Goldman Sachs has decided to honour the business in EMEA. The new head of EMEA financing (primary capital markets and private side solutions) will be Denis Coleman, who came up through levfin.

Coleman was formerly head of EMEA credit financing, a broad term for non-investment grade debt capital markets, taking in real estate, structured finance, leveraged finance, high yield, and restructuring.

Mike Marsh also gets a bump behind Coleman upwards, to become head of EMEA leveraged finance rather than head of EMEA high yield and leveraged loan capital markets.

Coleman got the space to move up because Jim Esposito, the global co-head of financing, has switched to the trading side to become chief strategy officer of securities. It’s not altogether clear what that involves, exactly — the memo announcing the appointment was long on cryptic pronouncements about the future of the fixed income, short on detail.

But it’s not going to be a retirement trade. Esposito is one of the firm’s most experienced bankers, and played a key role in driving Goldman up the bond arranger league tables in London.

Goldman’s memo seemed bullish on…Goldman, but also the broader fixed income industry. However, the bank’s numbers don’t necessarily support that. FICC was down 8% in the fourth quarter to $1.12bn. This decline was much smaller than some of its peers, but over the longer term, FICC did nearly twice that figure in Q4 2012, and three times that in 2009. Goldman seems to like the business more than Morgan Stanley, which is cutting a quarter of its fixed income staff, but the whole market is going to have to be smaller. More e-trading and muttering “blockchain” a few times can only go so far — at some point, banks need to cut staff.

We also ought to talk about BNP Paribas, as the French bank took the opportunity of its fourth quarter results to announce a restructuring of its investment bank. As restructurings go, it’s more in the HSBC camp than the Credit Suisse, Standard Chartered, Barclays or Deutsche — don’t expect a big bloodletting on the back of the announcement.

The main points are a €10bn net cut in risk-weighted assets, €1bn in cost savings through “optimising” and “industrialisation”, and developing business that use less capital and generate fees.

So the business plan is….increase revenues, and cut costs? Hard to fault the intention, but one wonders why BNPP wasn’t already planning to increase revenues and cut costs. The bank did say it had identified 200 projects that would be hit by the cost savings plan, and list off a series of fee business where it wants to grow.

It’s been widely reported as an initiative to cut the investment bank, but the bank spends plenty of time talking about how it is gaining market share as rivals retreat, as well as doing well on profitability and cross-selling with other BNPP businesses.

BNPP’s investment bank results are flattered, however, by a certain Gallic insouciance when it comes to allocating costs. All of the bad behaviour costs, as well as higher capital charges and contributions to the European resolution fund, go through “Corporate Centre” P&L, not CIB. Which is nice, for the investment bankers concerned.

Slightly more niche, but equally troubling, is the apparent failure of the UK’s drive to creating a retail bond market. The London Stock Exchange tried to follow the Italian example after its purchase of Bourse Italiana (which owns MTS) and drum up interest from UK retail in the bond asset class, setting up a platform called the “Orderbook for Retail Bonds” (ORB) to encourage lit trading and listing.

After a flurry of excitement, and bonds from household names such as RBS, Lloyds, Tesco, and various rugby clubs.

Some of the market markers on the platform are still optimistic, but Numis has just pulled out of trading, new issue volumes were way down in 2015 (and…haven’t started yet in 2016).

This ought to be a lesson for the European luminaries working on capital markets union. Regulatory change would help — and easing of prospectus rules would help ORB — but the main problem is competition.

The UK’s top borrowers have easy access to the Eurobond market, and its banks have worked through most of their crisis problems. Retail bonds are slower, more expensive and less predictable than institutional bonds or bank loans, and come with a truckload of reputational risk if a borrower gets into trouble.

Once you build it, you have to make sure there’s a reason to come.