When last we checked in on Credit Suisse, things weren’t going so well.
The bank had just reported a $6 billion loss - in the fourth quarter. The red ink for 2015 totaled some $3 billion, representing the firm’s first annual loss since the financial crisis. Shares promptly plunged 13% to their lowest level in nearly a quarter century.
That was the first time the market got a look at a report issued under CEO Tidjane Thiam’s new structure which aims to increase the bank’s focus on wealth management while scaling back investment banking where revenues fell 17% last year thanks to market “volatility.” Fixed income revenue plunged by two-thirds.
Thiam is planning on cutting some 4,000 jobs in the restructuring. Actually no, scratch that. As of Wednesday morning, Thiam is planning on cutting 6,000 jobs. On a call with reporters, the CEO - who took the reins last summer - announced the firm’s second restructuring plan in five months (“restructuring-er-er”) as trading revenue is now projected down a horrific 45% in Q1.
“We’re cutting deeper, there will be more restructuring costs,” Thiam told Bloomberg this morning. “What we’ve announced today is really pushing the cost-cutting program further,’ Thiam said in the interview. “If you look at markets, January was the worst January ever.”
Yes, “the worst January ever" as IBCM posted a Q1 loss as a dearth of primary market activity hurt underwriting revenues. Thiam has requested a 40% cut in his own variable pay. "Credit Suisse plans to exit most of the distressed credit, European securitized product trading and long-term illiquid funding, while equities will remain 'a core area of focus,'” Bloomberg reports.
Here's Goldman with a summary of what Thiam announced this morning:
- CS pre-announced weak results for 1Q16 with gross writedowns of $346mn in the GM business as of March 11 ($633mn in 4Q) and the bank expects further writedowns to result in a loss for 1Q.
- Management said GM revenues have remained weak, with negative operational leverage.
- YTD it has seen net new asset inflows for APAC, International Wealth Management (IWM) and Swiss Universal Bank (SUB) of CHF3.6bn, CHF7.1bn and CHF4.5bn, respectively.
- CS expects resilient pre-tax income in SUB.
- CS revised its headcount reduction target to 6,000 (vs. 4,000 announced earlier), of which 2,800 have been achieved YTD across all divisions.
- The incremental headcount reduction should be driven by additional GM restructuring.
- The revised gross cost reduction target would drive the group’s operating cost base to CHF3bn.
- For 2016, CS aims to achieve CHF1.7bn and CHF1.4bn in gross and net cost savings, respectively, and achieve an operating cost base of CHF19.8bn.
- Of the CHF4.3bn in cost savings, CHF1.2bn will be in the GM and IBCM businesses, CHF1.5bn at the Strategic Resolution Unit, CHF0.4bn at the SUB, CHF0.2bn at IWM and CHF1bn at the Corporate centre.
- CS has reduced its (1) distressed credit exposures to $2.1bn as of March 11 (from $2.9bn in 4Q15), (2) US CLO secondary exposures to $0.3bn (from $0.8bn in 4Q).
- Of the $346mn write down in 1Q, $115mn was in securitized products, $99mn in distressed credit, $44mn in leveraged finance underwriting and $88mn at the corporate bank.
- On GM rationalization, management said it intends to exit the following businesses (1) distressed credit, (2) European securitized products trading, and (3) long-term illiquid financing.
- The group is targeting a combined 35% RWA reduction in (1) flow credit trading, (2) US securitized products, (3) trading, (4) global asset finance and (5) single name & illiquid CDS.
- It targets a combined 16% RWA reduction in (1) structured equity derivatives, (2) flow equity derivatives, (3) corporate equity derivatives, (4) convertibles, (5) structured credit, (6) fund-linked products and (5) EM financing
Ok, so let's just break all of the above down in the simplest possible terms: 1) Thiam is cutting 50% more jobs than he was before, 2) trading revenue is a disaster and has basically been cut in half, 3) the bank is trying to get out of anything that even sounds like it might be dangerous in a stressed scenario, including distressed credit and anything that's securitized.
Who's fault is it that the bank was overextended in distressed credit and securitized products? Why, rogue traders' fault of course. "The firm’s traders had ramped up holdings of distressed debt and other illiquid positions without many senior leaders’ knowledge, helping lead to a first-quarter loss in the markets business," Thiam told Bloomberg, pulling a UBS. “This wasn’t clear to me, it wasn’t clear to my CFO and to many people inside the bank” he said. “There needs to be a cultural change because it’s completely unacceptable."
Right. Thiam also said there would be "consequences" for those responsible. We assume they will be included in the 2,000 employees who are now set to be fired. “A lot of the problems in the investment bank have been that people have been trying to generate revenue at all costs,” Thiam continued. “People were reluctant to reduce it because it would’ve exposed their cost problem.”
Or maybe they were "reluctant to reduce it" because head of global markets, Timothy O’Hara said in October that the bank "intends to defend [its] highly profitable securitized products and credit franchises, the former being "one of the strongest client positions of any business in the firm, while also being one of our most consistently profitable businesses within global markets.”
Global markets will incur a "big loss" in Q1. It's also where all 2,000 of the new job cuts are coming.
Anyway, quarterly losses and layoffs are good news, which is why the stock is up on Thiam's latest grim projections:
Thiam said he's "confident" going forward, although he doesn't want to get ahead of himself. "But really this is a very dislocated market, my natural caution makes me say that this is it for the moment. I don’t want to be hostage to fortune.”
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