Credit Suisse keeps on finding more costs to cut

October 25, 2012

By Dominic Elliott

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Credit Suisse is used to leading the pack on cost-cutting. The Swiss bank has been ahead of its peers since last year, when it made the first of three announcements that will see it reduce expenses by a cumulative 3 billion Swiss francs before the end of next year. Like an over-eager surgeon, it’s at it again – opening the European banks’ results season by announcing another 1 billion francs of cuts by the end of 2015. But with unrelenting pressure for more capital, investment banking remains a tough business.

Being the first to move didn’t do Barclays any favours with its admission of Libor misdeed, but Credit Suisse doesn’t appear to have suffered unduly from taking the lead on cost-cutting. Investment banking, where Credit Suisse has already taken out about 1.7 billion francs in costs, has turned a corner. It was the main contributor to the group swinging to a pre-tax profit of 1.2 billion francs after a loss in the equivalent period last year.

Yet there are good reasons for the bank’s managers to remain unsatisfied. Revenue in equities sales and trading, while up on the year-ago period, fell 11 percent quarter-on-quarter to 1 billion francs. The group can also do more to buttress its capital cushion, after a slight slip since it outlined a year-end target in July. The bank now expects to have a Tier 1 capital ratio of 9.3 percent rather than 9.4 percent by the end of December. And the boost to the debt markets from central bank action over the summer may fade with time.

Hence Credit Suisse’s obsession with the other side of the ledger. Most investment banks aim for a cost-to-income ratio below 70 percent: Credit Suisse’s stands at more than 80 percent. Another problem is investment banking compensation, which rose 4 percent from last year. Headcount also needs to fall after remaining constant at 20,600 over the quarter, although it is down 7 percent since last year. With fixed income pruned, equities trading, capital markets and advisory will be in focus.

Presumably, the cost cuts of 1 billion francs, of which 700 million will come from the investment bank, will reduce both pay and payroll. The key question is whether yet more will be needed.

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