Credit Suisse’s ‘mighty’ stocks unit withers under Thiam

Bloomberg

In October 2015, Credit Suisse Group AG Chief Executive Officer Tidjane Thiam and the head of its markets unit, Timothy O’Hara, laid out their vision for a business they said would be key to overhauling one of the world’s biggest
investment banks.
“Credit Suisse has consistently been a top-three trader of global stocks since 2010,” O’Hara, a 27-year veteran of the bank, told investors who had gathered in London. “It’s important to us that we invest in our content and execution capabilities to defend and grow our equities franchise.”
Almost two years later, O’Hara is gone and the equities business, once among the biggest on Wall Street, has become a nagging headache for Thiam, 54. The stock-trading group has lost almost one-third of its market share to rivals after a push into Asia backfired, a team wagering money on algorithms caused revenue to plunge by hundreds of millions of dollars, and a new unit set up for the most complex products frustrated traders.
Credit Suisse’s overall business is forecast to nearly double profit in the second quarter and Thiam has succeeded in areas like cutting costs, raising capital and dealing with bad assets. But for some analysts who predict a seventh consecutive drop in equities revenue — in a quarter where rivals like Morgan Stanley and Goldman Sachs Group Inc. were flat or higher — the business’s enduring problems are a reminder of prior strategic stumbles.
“The equities business is symptomatic of the bigger problems at the company,’’ said Piers Brown, an analyst with Macquarie Group Ltd. in London who has a sell rating on the bank’s stock. “This is why people have become disaffected with the Credit Suisse story.”

Dropping Ranks
Nicole Sharp, a company spokeswoman in New York, declined to comment. Credit Suisse is set to report second-quarter results on July 28, with five analysts surveyed by Bloomberg on average predicting a 96 percent jump in net income to 334 million francs.
Second-quarter equities revenue for Morgan Stanley, the world’s biggest dealer in stocks, was flat at about $2.2 billion compared with a year earlier, the New York-based bank reported July 19. At Goldman Sachs, it increased 8 percent to $1.9 billion, while at JPMorgan Chase & Co. it fell 1 percent to $1.6 billion.
For Credit Suisse, analysts at JPMorgan predict a 17 percent slump. Revenue from stocks trading has fallen in each of the prior six quarters, compared with prior-year periods. It accounted for about 13 percent of net revenue in the first quarter, down from 18 percent a year earlier. That left the bank in eighth place among the large securities firms, according to data compiled by Bloomberg.
Brian Chin, who replaced O’Hara as head of Credit Suisse’s global markets unit last year, and Asia Pacific markets head Ken Pang are overhauling their businesses to try and recover what’s been lost. Chin has hired executives from rivals, including Mike Stewart, who joined earlier this month from UBS Group AG as head of equities, and Mike Di Iorio from Barclays Plc as head of the division for Europe, the Middle East and Africa. Pang is firing traders and shrinking operations.

‘Encouraging’ Quarters
There are some signs of progress. Expenses have fallen at global markets, which covers trading outside of Asia-Pacific, and equities revenue at the unit has climbed sequentially since the third quarter. Across the company, Thiam cut expenses by 14 percent last year. He’s ahead of schedule with the wind-down of Credit Suisse’s bad bank, and he raised $4.3 billion in capital this year, allowing the bank to hold on to its profitable Swiss unit.
“Credit Suisse has cut a lot of costs in its investment-banking units, and we can’t say yet how much the franchise suffered,’’ said Bernd Ackermann, a senior director at S&P Global responsible for financial-services ratings. “However, the recent quarters were encouraging.’’
Part of the overall decline in equities has been beyond Thiam’s control, such as an 11 percent dip in the amount of equity derivatives traded by investors last year. Some was by instruction, as Thiam pivoted Credit Suisse away from risky trading operations to the safer business of managing money for the rich.

‘Overall Vision’
But for other analysts, the extent of the slump at a business that Thiam prioritized recalls other missteps under the CEO, who took over in mid-2015. High-risk debt-trading businesses lost about 1 billion Swiss francs ($1.05 billion) within months of his strategy announcement in October 2015, triggering an overhaul of the plan last year. Targets for wealth management also have been rolled back.
Equities trading “does not seem to be an area of priority,” said Gildas Surry, who helps manage about 1 billion euros ($1.16 billion) of financial-sector debt at Axiom Alternative Investments
in London.
“The overall vision of the new management for their franchise does not come across as clear or readable.”
Shares of Credit Suisse have gained about 2.9 percent this year, among the worst performers in the 37-member Bloomberg Europe Banks and Financial Services Index. The stock has lost 38 percent since Thiam first outlined his strategy in October 2015.
In Asia Pacific, tagged as a high-growth region for Credit Suisse, revenue from stock trading fell 16 percent in the first quarter after plunging in 2016. The CEO is now restructuring the business by firing dozens of workers and looking to shrink assets by up to 18 percent, not including those tied to equity derivatives, a person familiar with the matter said in April.
On trading floors in New York and London, employees in the global markets unit struggled with a new division Thiam created in March 2016 that brought together Credit Suisse’s derivatives businesses, including equity derivatives, people familiar with the matter said. The “solutions” unit — unusual on Wall Street, where banks tend to keep different equities businesses in one division — created confusion among traders and harmed performance, the people said.
Quant Unit
Overall revenue at the solutions unit fell 24 percent in the first quarter. Thiam reorganized the business last month, and Stewart will now oversee the equity derivatives portion.
Also looming large over the slump is the Systematic Market-Making Group, or SMG, a team that used the bank’s money to trade stocks based on algorithms, according to people familiar with the matter. SMG was responsible for much of the 38 percent decline in third-quarter equities revenue last year, though when pressed on the earnings call, executives initially blamed “weak client activity.” A few weeks later, Thiam announced that SMG would be moved into Credit Suisse’s asset-management division.
SMG often sought to profit from the difference between the values of equity-market indexes and their constituent stocks, a strategy known as index arbitrage, the people said. The unit relied at least partly on trading for its own account rather than facilitating client transactions, a practice called proprietary trading, according to the people.
After the financial crisis, U.S. policymakers took steps to ban proprietary trading in rules that took effect in 2015. In Europe, including Switzerland, regulators have instead demanded the region’s lenders increase the amount of funds they must use as buffers against possible losses.
Three-Year Plan
Credit Suisse considers itself in compliance with rules governing the practice, including the Volcker Rule, the Dodd-Frank Act’s U.S. trading regulation named for former Federal Reserve Chairman Paul Volcker, a person familiar with the matter said. The bank had been planning to move a team from the SMG unit to its asset-management arm since at least early 2015, before Thiam joined, to let it raise outside capital, Reuters reported at that time.
Thiam told employees this month that, after years of job cuts and shrinking the investment bank, Credit Suisse is working on a strategic plan for the next three years that will emphasize businesses with higher returns. Earlier this year, he singled out four units as having the highest returns on risk-adjusted capital: the Swiss bank, its two international wealth-management businesses and its advisory business.
Contrast that with the investor meeting in October 2015, when Thiam revelled in Credit Suisse’s results for the third quarter of that year. Equities revenue had climbed 12 percent as wealthy Asian clients traded more derivatives. Revenues from “systematic’’ trading “increased significantly.’’ Bond trading, which the CEO wished to shrink, had tumbled.
“It just happens to be kind of validation of the strategy and the direction of travel that we’re taking,” Thiam told investors at that time. “Emphasize Asia, emphasize equity, de-emphasize fixed income.”