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Banking Boring Again Even At Credit Suisse

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One way to make a lot of money in banking is just to be really good at it. But this is not a very good way! There are lots of people who want to make a lot of money in banking, and all of them1 have at least considered the approach of "just be good at it," so you have no real competitive edge if that's your strategy. You need to be creative and think outside the box, as you might say, if you were not very good at banking, as the law of large numbers says you are not.

I love me some Credit Suisse; they think outside the box. Then they sell the box to themselves in a roundabout fashion that magically removes it from their balance sheet. So when I saw this

“As we continue to reduce costs, continue to optimize our capital and we continue to have momentum on the client side we think we will be able to improve our return on equity toward that 15 percent target,” Dougan said in an interview with Bloomberg Television. “That’s something that’s achievable.”

I had so much hope! I mean, "reduce costs" is boring and sad, and "momentum on the client side" is just like "be good bankers" which whatever, but "optimize our capital" could mean all sorts of devious things.

It probably does but I couldn't find them. I mean, other than the usual devious things, which start with "Basel II.5 core tier 1 ratio increased by 2.2 percentage points to 14.7%, total capital ratio increased by 1.0 percentage point to 21.2" and segue right along into this funding stack:

Note that $43bn of equity on ~$1trn of assets is more like 4% equity than 21% "total capital." One way to have a high return on equity while also satisfying regulators about your capital is just to have a much more "capital" than you have "equity," which in practice mostly means having much higher assets than you have risk-weighted assets. This is an approach that Credit Suisse, and to be fair most other European banks, have enjoyed, and an approach that some people worry about. You can understand why - it looks kind of strange that banking regulators think CS has a 21% capital cushion while, um, math thinks it has ~4% - but the FT yesterday covered a speech by the guy in charge of Basel rejecting those complaints. His argument is that highly complex risk-weightings of assets driven largely by banks' internal models are "as simple as possible, but not simpler," which is sort of a depressing view of possibility and/or simplicity.

But to be fair, for CS at least there's not much evidence of increasing capital optimization by risk-weighting manipulation,2 so its plans to get back to high ROEs don't seem to come from "optimizing capital" in the sense of "tweaking models to optimize capital treatment of a highly levered balance sheet." Nor does it seem to involve issuing not-very-capital-looking-things to get capital treatment; while Credit Suisse is on the cutting edge of building instruments to get capital treatment, the capital actions they list this quarter are mostly pretty vanilla.3

Instead they come mostly from boring stuff - actually shrinking assets and cutting costs:

“Management is doing all the right things” in terms of shrinking the investment bank and reducing expenses, JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan said in a note to clients. We still “need to see a net improvement in underlying cost-income” ratio. ...

Credit Suisse, which announced 3,500 job cuts last year, said today it plans to achieve additional savings at the investment bank by driving synergies in the equities unit and continuing to “rationalize” businesses in some regions in fixed income, underwriting and advisory. The company will scale back support functions and coverage of offshore clients in private banking, it said.

Lazard and Evercore announced nice earnings today; their stocks are up but the message is mostly "the advisory business sucks but at least we're cutting salaries." Unlike Credit Suisse's stack of creepy opaque assets and the creepy instruments to fund them, LAZ and EVR are just guys in rooms with phones, so the optimizing there is grimmer. Fewer guys, fewer rooms, fewer phones, or fewer dollars going to them.

Honestly I was hoping for more from Credit Suisse. What you want out of the financial industry - and here I'm being partially serious4 - is magic; you want your financial engineers to create something out of nothing. Unlike other industries, which create value by building products for people to buy or whatever, finance creates value out of, like, the concept of value. Numbers on a computer become numbers in your bank account. Creating strong profit margins by working hard to win clients and generate revenues while keeping costs down by shutting down unprofitable businesses ... I mean, that's sort of being good at banking, in some drab and unimaginative sense. But without the magic, how good can it really be?

Credit Suisse to Cut More Costs as Quarterly Profit Falls [Bloomberg]
Basel executive rejects reform criticism [FT]
Lazard Outlines Cost Cuts as Profit Slumps, But Tops Expectations [Deal Journal]
Evercore Top Expectations As Expenses Fall [Deal Journal]

1. Except Citi, ZING!

2. Here is a rough "total assets to Basel risk-weighted assets" chart; you can roughly read this as "degree of unreality of capital" with higher numbers more befuddling:

3. Slide 23 of the earnings deck lists them, with shiny green check marks next to each one. Aesthetically I dislike that; there should be one unfinished one that's like "to come!" otherwise why have the check marks?

4. Like, 4% < x < 21.2%.