The Swiss bank booked a Sfr3.8bn impairment, with Sfr2.66bn recognised in global markets. David Mathers, the group's CFO, said that the goodwill dated from Credit Suisse’s purchase of Donaldson, Lufkin & Jenrette in 2000.
“It wasn’t exactly a successful acquisition, but people know that already,” he said.
But it was not just a kitchen-sinking of legacy bad news. Net revenues in the core banking units were down 35%, and even leaving out the exceptional items, the core bank made a loss of Sfr420m in the fourth quarter.
“The numbers reported today are weak even after adjusting for one-offs,” said BNP Paribas’ banks research team. “The driver of the weak performance was the investment bank, where Credit Suisse booked mark-to-market losses in high yield credit and structured products. These areas were weak again in January, which would point to a weak 1Q16 as well.”
Other items that knocked the bank off course were Sfr355m of restructuring expenses, as the bank slashed headcount following its new strategy announced October 21, and Sfr564m of litigation provisions.
“One reason we want to do the capital raise was to have the resources to restructure the bank,” said Mathers. “But market conditions have been materially worse than we hoped.”
The bank is planning to bring forward its planned job cuts, with “accelerated reduction in workforce of approximately 4,000 positions”.
Chief executive Tidjane Thiam said that the bank could not disclose the breakdown by geography, as some of the individuals involved had not yet been told. However, he noted that London was a place where Credit Suisse had already committed to reduce costs, with about 2,000 job losses expected. “Right sizing” the London office is expected to save Sfr900m.
In the individual business lines, things did not seem much better.
Ugly IB
Investment banking and markets was particularly ugly. Markets was “adversely impacted by high inventory of long-dated illiquid assets from the legacy fixed income business”.
Global markets reported a loss of Sfr664m, compared with a Sfr375m gain in the fourth quarter last year, after adjusting the numbers for exceptional items and debt valuation. Without adjustments, the loss in markets was Sfr3.47bn.
This number reflected “resilience in equities, and significant mark-to-market losses on yield products in fixed income”. It also supported “subdued client activity because of widening credit spreads, a sharp decline in energy prices and a lack of liquidity.”
Revenues were Sfr1.13bn, down 37%, mainly on the terrible fixed income numbers – down 61% to Sfr303m.
It described weak securitized products trading reflecting mark-to-market losses in CLO, private label CMBS and agency trading. The bank appears to have been shrinking its business here, cutting its US CLO trading book from $1.3bn to $0.8bn from the third quarter to the fourth, and another $200m in January. However, this runs the risk of crystallising the price declines.
Equities was also grim, down 26% to Sfr602m, with the bank highlighting poor market conditions in Latin America, and lower fund linked products performance.
Credit Suisse now appears to report its underwriting businesses partly in markets and partly in investment banking — a reasonable proposition, as capital markets is a joint venture between the two.
Losses such as a $86m mark-to-market loss on leveraged finance underwriting are also split.
Within markets, debt underwriting was up 10% to $176m, and equity underwriting was up 51% to $106m. Credit Suisse’s reasons for switching at random between Swiss francs and dollars as a reporting currency are not recorded.
The investment banking side, however, seems to have had the worst end of the deal. Debt underwriting was down 22% to $162m (with $43m marked down for levfin), while equity underwriting was down 33% to $102m.
Where’s the risk?
It said it had increased its investment grade underwriting exposures 148% from 2014 to 2015, to $14.4bn, while it increased non-IG exposure from $7.2bn to $11.7bn, of which $5.2bn was single B. However, the bank said only 3% of this was energy-related.
It said 56% of the non-IG leveraqed finance book was computers and electronics, 13% was chemicals and 28% was “other”.
Of the bank’s mark-to-market losses in the fourth quarter, 56% was in credit, broken up into 33% distressed, 6% par and 17% being the $86m in levfin losses. Some 23% was in securitized products, split between 14% private label and 9% agency.
Advisory was up 28% to $251m, while the bank anticipated a strong pipeline ahead, based on announced but uncompleted deals from the fourth quarter.
Separating the Swiss
Asia Pacific now also reports separately, folding investment banking and private banking alike into the business. Asian investment banking revenue was up 20% on the year to Sfr555m, but a large part of the goodwill impairment was booked in Asian investment banking, taking it to a loss of Sfr665m.
The bank described substantial improvements in Asian emerging markets financing and improvement in equities trading, but lower revenues in equity derivatives. It noted a decline in Asian M&A, IPOs and follow-ons, but higher debt underwriting.
In dollars, Asian fixed income was up 69% to $139m, Asian equities was up 10% to $377m, and Asian underwriting and advisory was down 14% to $80m.
No sale to Wells
Ahead of the results, a rumour, based on a story in Hedge Fund Alert, was circulating that Wells Fargo was poised to buy Credit Suisse’s investment bank. Both institutions categorically denied the claim.
“There’s a rumour industry, generally when there’s a rumour, someone is making money out of it,” said Thiam on the media call. “It’s generally clear after months of work that the investment bank is important to our strategy.”
He said that banking, and investment banking, provides a useful function. “We recognise having an investment bank with the private bank creates value. If you have a strategy that is innovative and different, there will be a lot of sceptics. But the sceptics help you make money in future.”
Thiam continued: “People have to stop the demagoguery”, referring to criticism of investment banking by the public and the market. “We’re not going to throw the baby out with the bathwater. It’s not a popularity contest.”
The bank’s shares were down 11.5% at midday on Thursday.