Credit Suisse posted a loss of SFr637 million for a dire final quarter of 2011. Offset the bank’s SFr263 million of gains on accounting for the value of its own debt with SFr981 million of charges on restructuring and capital requirements, and the underlying business still did not break even. The investment bank posted a loss of SFr1.3 billion for the quarter.
Full-year results make for pretty grim reading too: profit of SFr1.9 billion and an underlying return on equity of 7.3%.
Brady Dougan, Credit Suisse’s chief executive, understandably branded the results "disappointing". And you can add to that extremely worrying for the banking industry as a whole.
Credit Suisse is, to some extent, hampered by the requirements of its Swiss regulators to hold capital at much higher levels than demanded by Basle III or other regulators. Its Basle 2.5 tier ratio was 15.2% at the end of last year.
However, the issue here is that Credit Suisse is struggling to make its model work. The worry for the rest of the industry is that Dougan and his colleagues were the first big global bank management team to reorganize their investment bank in anticipation of greater regulatory scrutiny, higher capital charges and the end of the era of proprietary trading.
Credit Suisse continued to reduce its risk-weighted assets (RWA) dramatically and built a big capital cushion. It focused on client business. By the first quarter of 2010, the strategy looked to be working spectacularly well: Credit Suisse had a tier 1 ratio of 16% and a return on equity of 23% that put its rivals in the shade.
However, those initial plans to reduce RWA did not go far enough. Between Q4 2007 and Q1 2009, RWA fell by 39% in the investment bank. Now Credit Suisse expects to hit its Basle III RWA target of $229 billion nine months early, by the end of Q1 2012. RWA fell SFr35 billion in Q4 2011.
Dougan has stated again and again that a high-capital, low-RWA, client-focused business can make returns on equity of 15%. He’s also been forthright in stating that Credit Suisse’s earnings would be more stable than its competitors and that, in a downturn, his bank should relatively outperform them.
But neither Dougan nor his peers expected markets to be as tough as they were in Q4. Fixed income sales and trading posted net revenues of just SFr36 million for Q4; equity revenues were little more than half those in Q4 2010; and underwriting and advisory were around 60% down on the same quarter last year.
Dougan said as the results were announced: "In mid-2011, we decided to aggressively reduce risks and costs. This decision was rooted in our belief that the market and regulatory environment is undergoing fundamental change, and that by embracing these developments and proactively adjusting our business model, we can position Credit Suisse to succeed in the new environment."
It sounds remarkably like what he was saying in 2008 and 2009.
As he told Euromoney in July 2009: "If we can drive our performance through client business, and be there for them through both good and difficult times, then we’ll show consistently good returns. But this is not easy, it will require a lot of focus and will have to be proven for the long term. A few quarters are not enough."