Over the past decade, Credit Suisse investment bank has consistently had a higher cost base than its rivals, despite repeated attempts to tackle it. Unless it makes progress soon, it could be time to bring out the knives again. My latest column for Financial News:
Even in an industry that moves as fast as investment banking, some things seem to stay the same. In March 2002, John Mack, the then chief executive of what was Credit Suisse First Boston, admitted bluntly: “We have a cost problem.”
Mack had been parachuted in during the summer of 2001 to sort out the mess left behind by years of profligacy under his predecessor Allen Wheat, which had culminated in lavishing nearly $13bn on the purchase of Donaldson, Lufkin & Jenrette just a few months after the dotcom bubble had burst.
Mack inherited an investment bank with the highest cost-income ratio on Wall Street (it actually made a loss of $1bn in 2001), the highest compensation ratio, and a cost base that was effectively 80% fixed through guaranteed bonuses.
Credit Suisse was, in short, an investment bank with a structural cost problem.
Fast-forward 10 years, and there’s a sense of déjà vu. Credit Suisse’s investment bank lost more than Sfr400m last year, and its cost-income ratio of 103% was the second highest of any significant investment bank, according to my analysis.
The industry average across a sample of 15 investment banks was 78% after a challenging year. Take a step back and look at the past decade, and you see that Credit Suisse’s struggle with costs is nothing if not consistent.
Between 2002 and 2011, total costs swallowed 95% of revenues, compared with a weighted average of 76% at a basket of six broadly comparable investment banks.
Its cost-income ratio has lagged the industry average in every year except 2007 – and until the first quarter of this year the gap was getting wider. That structural cost problem that Mack spoke about in 2002 isn’t going anywhere fast.
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Mack wasn’t known as “the Knife” for nothing and he attempted to tackle costs by firing thousands of staff. The response of the current management team, led by Brady Dougan at group level and Eric Varvel at the investment bank, has been a little more measured.
Last summer, the bank announced that it would cut Sfr1bn ($1.03bn) in costs, with the majority of cuts falling in the investment bank.
In the first quarter of this year, its cost-income ratio fell to 76% against an industry average of 63%, but this was still second only to Nomura on 95%.
No man’s land
So what is it about Credit Suisse? There is a paradox here, because in many respects Credit Suisse has led the field in adapting to the financial crisis, by cutting costs and headcount sharply in 2008, in deleveraging, and in exiting some of the more exotic corners of the financial markets.
The problem appears to be twofold…