Credit Suisse’s investment bank does not appear to be in a healthy state. In the fourth quarter of 2012, it had a cost income ratio of 202%; for full year 2012, the cost income ratio was 98.6%.
Something seems to be up.
The fourth quarter horrors can be partially attributed to one off events: “Net revenues reflected losses from businesses we are exiting and the reduction of risk-weighted assets, in line with our strategy,” it explains.
On the other hand, however, Credit Suisse also appears to have suffered disproportionately in a difficult market: “Our performance was impacted by continued subdued client activity levels and a volatile trading environment,” it says too.
Nowhere was this more evident than in fixed income, where despite a 9% increase in interest rate and credit VaR and a 40% increase in FX VaR, revenues collapsed 96% year-on-year as the bank exited some businesses, sold down risk weighted assets and kitchen-sinked losses. The extent of the horror is illustrated in the chart below. It’s all the more poignant given that the likes of Bank of America did rather well in FICC in Q4.
Hacking away at headcount, especially senior headcount
Credit Suisse is in the middle of a CHF2bn cost cutting programme. CHF1.2bn has already been cut, with CHF1bn of that being extracted from the investment bank. Nevertheless, perversely, CS ended 2011 with 200 more investment bankers than it had at the end of 2010.
Senior staff are likely to suffer disproportionately from further cost reductions this year. Credit Suisse dispensed with numerous of its senior credit and rates professionals last year, and today declared its intention of continuing to eradicate expensive people, stating: “Compensation expense to decline, driven by reduction primarily in senior staff as we rationalize and reallocate resources.”
And yet, as ever, while some businesses are clearly struggling, others are doing fine. The chart below, taken from today’s results indicates potential enthusiasm for hiring in FX, rates, emerging markets, commodities, derivatives, prime services and ECM. On the other hand, uou would not wish to be working in EMEA M&A.
The horrible and yet mysterious state of pay
Unsurprisingly, Credit Suisse is paying less. Yet its most senior staff may end up doing rather well for themselves.
The bank argues that it has reduced its bonus pool by 41% when cash and deferred compensation paid out in 2011 are taken into consideration. However, this figure includes the PAF2 derivatives- bonus-structure-for-senior-employees. Given that PAF2 isn’t being expensed until Q1 2012, it shouldn’t really be included in the bonus figure for 2011. When it’s not, bonuses paid in cash and stock expensed in 2011 fall to CHF2.5bn, from CHF5bn earlier – a reduction of 50%.
Even this is not the full picture, however. The total 2011 Credit Suisse bonus pool (including the investment bank and all other businesses, and including all cash and all stock paid last year and deferred until future years) was CHF6.2bn. In 2010 it was CHF11.9bn. Overall, therefore, bonuses across the bank are down 48%.
The good news is that the proportion of bonuses paid in cash is up. In 2010 17% of the total bonus pool was cash. In 2011, that rose to 24%. This reflects the fact that Credit Suisse’s cap on cash bonuses has been increased to £173k, from a merest £34k for 2010. Beyond £173k, deferrals start at 15% instead of 35% previously.
The PAF 2 mystery
In the broader picture of Credit Suisse's Q4 results, PAF2 remains a curiosity. Accounted for at CHF500m in Q1 2012, it could be worth CHF2bn for the full year - almost as much as the bank's vested bonuses for 2011 a whole.
Credit Suisse said previously that 18% of its derivatives exposures were being put into PAF2. Given the apparent fire sale of risk weighted assets in the fourth quarter and associated kitchen-sinking of FICC losses, it seems fair to question how much of Credit Suisse's CMBS exposures and other securities have gone into PAF2 - and whether they might end up being worth rather a lot of money when they can first be sold in four years' time. If so, senior bankers who manage to avoid getting axed at Credit Suisse could end up doing rather well for themselves.