Credit Suisse Hides the Secrets of Its Success

(Bloomberg Opinion) -- Tidjane Thiam, chief executive of Credit Suisse Group AG, says one of his most senior managers has told him not to be too bullish. He should heed the warning.

The Swiss bank reported first-quarter earnings on Wednesday that beat estimates for both net income and revenue. Wealth management assets increased by a net 5 percent, marking a rebound from the end of last year. Even trading activities, which have dragged on the group, were better than hoped for. They outperformed Wall Street.

This should all vindicate Thiam and his vision to pivot the firm toward managing money for the rich, while maintaining a chunky investment bank to serve those same customers. In particular, the strategically crucial stock-trading business appears to have turned a corner finally.

A rebound in bank-wide revenue in March (its second-best month in three and a half years) has carried on into April, adding to the upbeat tone.

Yet, as the head of the equities business warned Thiam, there are reasons to remain cautious. While that division appears to have arrested a long-running erosion of its market share, its sales were driven primarily by structured derivatives trades: A lumpy business with potential downside. What’s more, the bank’s profitability targets might not be attainable if revenue — which was still down 4 percent in the first quarter when compared to last year, despite the recent recovery — doesn’t get back to where it was in 2018.

Credit Suisse Hides the Secrets of Its Success

Of course, the earnings were a pleasant surprise to those resigned to seeing Europe’s finance giants losing ground to Wall Street. In contrast to the bleak picture painted by its cross-town rival, UBS Group AG, just last month, Credit Suisse saw fixed-income trading revenue fall 2 percent in dollar terms and equity sales decline 5 percent. American peers posted an average 10 percent drop in fixed-income revenue while equity trading sales fell an average 21 percent.

Credit Suisse’s transaction income from rich individuals rose 3 percent in the first three months of the year, primarily bolstered by its international wealth management unit. By contrast, UBS has warned its income in this area may have fallen by 25 percent in the same period. While Asian clients did less business in the first quarter, Thiam said sentiment in the region has improved this month. It won’t be like 2018, which was unusually strong, but things are improving, he said.

It’s less clear whether transaction revenue and trading income are sustainable. Both were boosted by what Credit Suisse described as “landmark transactions” in its International Trading Solutions (ITS) division, the bank’s joint venture between its wealth management, markets and Swiss units. Credit Suisse highlighted three deals: a $2.2 billion financing, a derivative on the Swiss Market Index sold to private banking clients, and a $650 million structured note for an asset manager.

But it’s not given that trades of these sizes can be delivered every quarter, and they do expose the firm to some longer-term risk. There’s also very little transparency about the ITS division. Thiam was keen to stress its success (its sales rose 23 percent year-on-year from 2018), and said the venture was being replicated in Asia. But that’s all we know. The bank doesn’t break out any detailed figures and doesn’t intend to. Part of the reason for the venture’s strong start is that there’s not that much disclosure on it, Thiam told an analyst who pressed for more information.

The danger is that management chases revenue at all costs now. Credit Suisse targets a return on tangible equity of at least 10 percent in 2019, and 11 to 12 percent in 2020. Yet the decline in revenue in the first quarter led to a return of just 7.8 percent.

The shares jumped on Wednesday, before easing back to a more modest 3 percent rise. In warning Thiam not to be too optimistic, his stock-trading chief was exercising due caution. It’s too early to pop the champagne.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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