Best investment bank

CREDIT SUISSE: Tough decisions taken in 2007 and 2008 leave Credit Suisse’s investment bank in a prime position for the years ahead

Credit Suisse rebuilds its model

How, it might be asked, can a firm that lost SFr14 billion ($12.8 billion) in its investment banking division in 2008 be in the running for an award such as this just six months later? Well, you also need to ask: how has the same firm turned itself around to such an extent that it is now considered to be one of the biggest winners of the credit crunch, and one of the firms to be reckoned with in investment banking in years to come?

A broad consensus – such that it almost certainly won’t actually come to pass – has grown that suggests that there will be a handful of leading investment banks in the future. You would expect to see the names of Goldman Sachs, Barclays, Deutsche Bank, JPMorgan and Morgan Stanley in the list. The presence of Credit Suisse might well be a surprise.

But the firm’s competitors now rate it as a serious rival. Analysts are also predicting good things for Credit Suisse. A June report from analysts at JPMorgan made it the top pick in investment banking, citing five factors: continuing market share gains in investment banking; the restructuring of cost- and risk-taking businesses within the investment bank; a lack of management turnover; limited credit risk; and capital strength.

In addition, Credit Suisse raised its own capital and did not look to the government for support. The bank has been disciplined with regard to its approach to compensation, including the introduction of the partner asset facility, which linked bonus payouts for investment bank staff to the performance of a pool of impaired assets.

And by concentrating on client-related business, the firm has been able to increase market share across all of its main businesses.

In these post-credit crunch times, that sounds like the very model of a modern investment bank.

Paul Calello: aggressive risk reduction

Credit Suisse, led by investment bank chief executive Paul Calello, began to rethink its businesses quite early in the cycle. By the time of its Q2 earnings call in 2007, its management was already warning of the risks from US sub-prime. As the crisis worsened, it became clear that Credit Suisse would have to take some tough decisions – not least because the markets that were getting worst hit were those at which the bank excelled. The most notable among these were commercial mortgage-backed securities and leveraged finance. The firm has since exited CMBS completely, and also withdrawn from leveraged finance outside the US.

These decisions were articulated alongside the announcement of the new-look Credit Suisse investment bank in the fourth quarter. The bank also exited most parts of principal trading, highly structured derivatives and non-US RMBS.

But the aggressive reduction of impaired assets in its investment banking book had been going on for some time. These assets, which totalled SFr99 billion in the third quarter of 2007, were reduced to just SFr8 billion by the first quarter of this year.

That aggressive risk reduction has been matched in other areas: for example, directional credit trading assets were reduced by 80% from Q4 2007 to Q1 2009. The one-day average value at risk in the investment bank fell 66% over the same period; and risk-weighted assets fell 39% to $145 billion, with an intention to reduce them still further to $125 billion by the end of this year.

All of this repositioning has been carried out with a religious attitude towards fair-value accounting. No exposures have been transferred into accrual books. In leveraged finance, for example, Credit Suisse had just $600 million of commitments at the end of the first quarter of 2009, having written down $3.4 billion. JPMorgan, by contrast, had $5.5 billion of commitments at the end of 2008, having written down $5.9 billion, but still had $9.3 billion of leveraged loans in its hold book.

What is now becoming clear is that Credit Suisse took the pain in 2008 and is reaping the rewards in 2009. Its first-quarter 2009 earnings showed impressive momentum. Return on equity for the group was the best in its peer group at 23%, on net income of $1.8 billion. Return on equity for the investment bank alone was 42%, just behind market leader Goldman Sachs. At group level, the bank now has one of the strongest capital bases in the market, with 14.1% tier 1 capital and 9.3% core tier 1 capital, following a SFr10 billion capital-raising in October 2008.

Credit Suisse still has a way to go. It is seeking to expand aggressively in flow areas such as foreign exchange and rates. It could do a lot better in capital markets, although it has picked up some prime equity capital markets mandates in the first few months of this year. But the platform the firm now has stands it in very good stead for the years to come, and it might well be that other firms will seek to replicate some of the fundamentals of its model.

Credit Suisse rebuilds its model