Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Credit Suisse Group AG is promising another 1 billion Swiss francs ($990 million) in cost cuts. That's fair enough, considering what Chief Executive Officer Tidjane Thiam called "unsupportive" financial markets. But hopes that this can be achieved without harming revenue look optimistic indeed. Thiam's strategy is still on borrowed time.

Future Perfect
New cost savings and new financial targets have given a lift to Credit Suisse's share price
Source: Bloomberg
Intraday times are displayed in ET.

Take the global markets business, which houses securities trading. Thiam has swung the ax deep in this division, cutting some 3,500 from headcount this year. It still sees the division as a source of cost savings, with operating expenses at the unit due to fall from $5.2 billion at end-2016 to less than $4.8 billion in 2018. And yet, it also seems to think the worst is over: It expects annualized revenue to stabilize at around $6 billion after falling about 32 percent since 2014.

If you believe Thiam, Credit Suisse will, somehow, prove the exception to the classic investment banking conundrum: as you cut costs, you lose revenues, raising the risk of more cost cuts.

Rebound Ahoy
Credit Suisse expects its Global Markets division to post a revenue bounce-back even as it cuts costs
Source: Company filing, Q3 figure is trailing 12-month

A lot of this optimism seems to depend on the outlook for financial markets -- more interest-rate hikes in the U.S. would ideally fatten the profitability of banking and volatile trading operations. There's also the fact that so much restructuring blood has been spilled in 2016, so ideally the effects will simply keep trickling through.

That looks pretty upbeat. Thiam didn't spell out how the cost controlling will be achieved, but it's a fair assumption that it will mean more job cuts. Global markets headcount stood at 11,680 in the third quarter, or about 25 percent of the whole company workforce -- that's a fair chunk of compensation costs. The drive to scale back the bank's presence in the pricey city of London could be rolled out in New York, according to Citigroup Inc. analysts.

Incredible Shrinking Banks
The worst five investment-bank revenue losers this year according to Bloomberg Intelligence
Source: Bloomberg Intelligence

Thiam is executing a totally fair strategy of shrinking the most volatile part of the bank and relying on more dependable businesses like wealth management. But there's a mountain to climb. Bloomberg Intelligence reckons Credit Suisse next year will go from the least profitable top European bank with a return on tangible equity of 1.48 percent to the fourth-least profitable at about 4.9 percent. That's objectively still a very weak figure and a long way from the 9.2 percent expected at arch-rival UBS.

Ultimately, if you believe there's a rising market tide ahead that will lift all boats, you can also believe in a Credit Suisse turnaround. But the reality of this restructuring story is that the bank's brand power and revenue base have been damaged. And dreams of a new growth cycle for investment banking imagines there's enough to go around for everyone -- even those banks that are still in cost-cutting mode and that are failing to generate enough returns to cover their cost of capital.

Betting on cost cuts that don't hurt revenue looks suspiciously like having your cake and eating it. Investors will probably still have to wait for Thiam's work to bear fruit.

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

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net