Dec 7 (IFR) - Credit Suisse is to cut more costs from its global markets division in an effort to meet group pre-tax profit targets for 2018. Those initial targets were set out by chief executive Tidjane Thiam in October 2015 but market conditions have changed, calling for a revision of his plans.
“I have always said we can get there [pre-tax profit target] by growing revenues or cutting costs. We are flexible given the unsupportive market environment,” Thiam told investors at a market update in London.
The bank said it had achieved its plan of cutting 6,000 jobs across the group over the last year. Initially 4,000 roles had been earmarked but that went up by a further 2,000 positions in February, all from global markets, which reported worse than expected earnings.
Overall, a net 6,050 people have now left the organisation. Neither Thiam nor Brian Chin, CEO of global markets, outlined where the further costs would come from. Chin intends to keep all the remaining product areas in equities and fixed income, having cut back its macro trading offering and refined its securitisation desk.
Efficiencies are expected to come from strategic changes. “We will target structural cost changes and not simply do a pro rata cost reduction across businesses,” said Chin. “We want to be very strategic about it, for example by redeploying people out of high-cost locations.”
Chin said that after a turbulent year, dominated by the restructuring, trading in the markets businesses had stabilised. Revenues for the 12 months to the end of September stood at US$5.5bn, down 23% compared with the whole of 2015, and 32% below the levels seen in 2014.
Chin expects annual revenues will now rise to US$6bn by 2018. Costs are anticipated at US$4.8bn by then, 8% lower than currently, which should give a return on equity of at least 10%. However, analysts said the division’s US$1.2bn pre-tax profit target was more like an 8% RoE .
“There appears to remain a RoE gap,” said Jeremy Sigee, analyst at Barclays. “The question will be whether they can deliver a sub-consensus cost number [in global markets] while maintaining as-consensus revenues.”
More ambitiously, Thiam expects that the strong year for advisory revenues in the investment bank and capital markets division will be repeated and fees, stemming largely from Asian outbound deals, will rise even faster, since those transactions play to Credit Suisse’s strength.
The revised plan sees investment banking fees increase by 60% over the next three years. That would produce returns on regulatory capital in that division of between 15% and 20%.
Thiam dismissed fears that China would implement its capital controls on outbound investments more rigorously, hampering this trend.
“I don’t believe the Chinese government wants domestic savings to flow into domestic assets. Those assets can’t grow forever as that would be bad for domestic cohesion. There is a tactical reason to slow that down a bit,” he said. “There are US$3trn of FX reserves so the [outward investment] trend is unstoppable.”
Much of the Asia-Pacific investment banking revenues are booked in the geographical division. As a group, a third of equities trading revenues are made in the Asia-Pacific division, not global markets.
However, the severe equities slowdown in Asia-Pacific means that the profit target for this business has been revised down by SFr500m to SFr1.6bn. “We need to lower our targets here,” said Thiam.
The group also said the profit target for its asset management activities in the international wealth management division would also be revised down.
Still, Thiam was bullish for the year ahead. “We are protecting returns during volatile markets to provide significant upside when conditions improve and there’s good reason to believe that they are improving,” he said.
The changes were welcomed by investors, with the shares up 5% at SFr15, the highest since April. (Reporting by Christopher Spink)