Credit Suisse Takes The Pain

Investment banking revenue is sliding and the bank still needs to shrink

Credit Suisse CEO Tidjane Thiam proved he could wield an ax in the first quarter, slashing staff and assets in a bid to ride out the turmoil in global markets. But progress will only get tougher from here.

Swiss Finish

Credit Suisse has tumbled 41% over the past year

Like other big investment banks such as Deutsche Bank or Barclays, Credit Suisse had an ugly start to the year -- yet successfully managed to clear a lowered bar for market expectations. The bank reported a 302 million-franc ($311 million) net loss, hit by weak capital-markets trading and losses from asset sales. Analysts had, however, been predicting an even worse performance. With the wealth management business helping to cushion the pain and capital holding steady, the bank's shares jumped more than 5 percent on Tuesday morning.

Revenue Pain

Cost cuts and rough markets in the first quarter hit European banks' ability to generate revenue

Source: Company reports

Thiam looks like he's weighted his cuts to the first quarter, allowing the costs of an expensive restructuring to be lost in the noise of a dismal quarter for the industry. As of May 10, Credit Suisse had eliminated 3,500 staff. That's almost the entirety of the 4,000 the bank said it would in February, a target that was ramped up the following month to 6,000 amid mounting market pressures. Operating costs fell 3 percent.

It's not just headcount -- there was also pain from slashing assets at securities businesses Thiam once said did not merit their reputations as "ugly ducklings." At the global markets unit, distressed credit assets were cut by almost 80 percent. Cuts to the bad bank, the pool of assets Credit Suisse wants to get rid off, exceeded the company's own target.

So investors judged a second straight quarterly loss as an acceptable price as Thiam steers the company away from investment banking and toward wealth management -- a strategy pioneered by rival UBS, one of the few European banks to trade at a premium to book value.

Trailing UBS

Credit Suisse's price to book value ratio lags its Swiss peer

Source: Bloomberg Intelligence

But there were some other, more worrying, sacrifices. Net revenue fell 30 percent in the first quarter; at the global markets unit, it sank 62 percent. That's a worse performance than peers such as Deutsche Bank and Barclays. Investment banking is a fiendishly difficult business to shrink without losing revenue and Thiam has committed to yet more cuts throughout the year. The other promised engines of growth at the bank -- Asia-Pacific and wealth management -- are facing revenue troubles of their own as client trading dries up and economic growth slows.

This picture could get worse. Even if the overall business environment appears to have improved since February, Credit Suisse's own outlook suggests there will be tough times ahead. The bank said "subdued" market conditions are likely to stick in the second quarter "and possibly beyond."

Restructuring costs will likely go up as more assets are wound down. CFO David Mathers said it's difficult to estimate how far the bank will be able to reduce distressed assets, making the outlook for the second quarter unclear. Energy loans may also see more loan-loss provisions.

Investors are clearly looking for any signs of a turnaround in beaten-up bank stocks. Credit Suisse still trades at a 40 percent discount to its book value -- and Thiam has scope to narrow that discount if he delivers on his plan. But the risks he faces this year alone leave him with little room to stumble.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Lionel Laurent in London at

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