Credit Suisse has bad news for debt wannabes
By Dominic Elliott
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Credit Suisse’s fourth-quarter results contain bad news for fixed-income wannabes. The Swiss bank was among the first to adjust its debt-trading business to the harsher realities of new Basel III regulations, so it can probably weather the 28 percent quarter-on-quarter revenue drop it has just suffered in this segment. Other rivals may be less fortunate.
Fixed-income trading is a two-league competition. Goldman Sachs and the five balance-sheet “flow monsters” comprise the top flight with a combined market share of about 60 percent. Other banks – including Credit Suisse – are scrapping it out in the second division.
At this stage of the bank reporting season, there’s little to suppose that any of the second-tier fixed-income banks are closing the market share gap in a meaningful way. Fixed-income revenue at Morgan Stanley was down 44 percent quarter on quarter, a bigger fall than at the Wall Street banks in the debt-trading premiership.
Yet market share is only one way to view the fixed-income world. Credit Suisse, whose former fixed-income head Gael de Boissard was promoted to co-run overall investment bank operations, has spent the last year focusing on profitability. By its count, 80 percent of the 81 fixed-income business lines CS has retained made a return on equity last year of 15 percent under Basel III.
That may be down in large part to the beneficial conditions that prevailed last year for credit and securitised products. Negative real returns on government bonds pushed investors to seek yield on lower-grade debt, and as a result it was relatively easy for Credit Suisse to make a turn. By contrast, the environment was poor for interest rate and foreign-exchange trading, where scale players tend to overshadow Credit Suisse.
Nonetheless, the Swiss bank made the most of the conditions. In the third quarter of last year it made revenue on every day it traded, a cleaner record than at Goldman Sachs and JPMorgan. In the fourth quarter, it lost money on only two days, each time less than 25 million Swiss francs. That’s impressive though the bank also cut risk-weighted assets in fixed income by 31 percent over the year to $122 billion.
But market share is still one important indicator of fixed-income health. A quarter ago, Credit Suisse’s smaller size appeared no great barrier to revenue. After the precipitous 28 pct fall in the period just gone, second-tier rivals BNP Paribas, Societe Generale and Royal Bank of Scotland may fear that the good early news was a false dawn.