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Credit Suisse needs to tighten its suspenders

Credit Suisse is used to leading the pack on cost-cutting. The Swiss bank was ahead of its peers last year when it revealed a three billion Swiss franc plan to reduce expenses. Like an over-eager surgeon, it's at it again – opening the European banks' results season by announcing another billion francs of cuts. But with unrelenting pressure for more capital, investment banking remains a tough business.

Being the first to move didn't do Barclays any favours with its admission of Libor misdeed, but Credit Suisse doesn't appear to have suffered unduly from taking the lead on cost-cutting. Investment banking, where Credit Suisse has already taken out about 1.7 billion francs in costs, has turned a corner. It was the main contributor to the group swinging to a pre-tax profit of 1.2 billion francs after a loss in the equivalent period last year.

Yet there are good reasons for the bank's managers to remain unsatisfied. Revenue in equities sales and trading, while up on the year-ago period, fell 11 per cent quarter-on-quarter to one billion francs. The group can also do more to buttress its capital cushion, after a slight slip since it outlined a year-end target in July. The bank now expects to have a Tier 1 capital ratio of 9.3 per cent rather than 9.4 per cent by the end of December. And the boost to the debt markets from central bank action over the summer may fade with time.

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Hence Credit Suisse's obsession with the other side of the ledger. Most investment banks aim for a cost-to-income ratio below 70 per cent: Credit Suisse's stands at more than 80 per cent. Another problem is investment banking compensation, which rose 4 per cent from last year. Headcount also needs to fall after remaining constant at 20,600 over the quarter, although it is down 7 per cent since last year. With fixed income pruned, equities trading, capital markets and advisory will be in focus.

Presumably, the cost cuts of one billion francs, of which 700 million will come from the investment bank, will reduce both pay and payroll. The key question is whether yet more will be needed.

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