Gaël de Boissard, co-head of global securities

Credit Suisse's co-head of global securities explains how the bank's capital model has helped it survive the crisis in good shape, and thrive in the aftermath. Writer Geraldine Lambe

Credit Suisse has had a pretty good crisis. It has not required state aid, nor has it had to seek solace in the arms of a sovereign wealth fund or generous cornerstone investor. Instead, the crisis has seen the bank cement its own turnaround, and drastically boost its equity and investment banking businesses. It did not escape unscathed, of course. Credit Suisse posted a full year net loss of CHF8.2bn ($7.78bn) for 2008, but rebounded with a CHF6.7bn profit in 2009, largely due to its best-ever performance in investment banking.

The bank has cast itself an identity built on prudence and sound capital management. This has been helped by the distinctive approach taken to compensation. At the height of the crisis it established the groundbreaking Partners Asset Facility (PAF), through which bonuses were paid out of illiquid loans and bonds. In this year's bonus round, it has kept a lid on expectations: variable compensation for 2009 was down by 21% versus 2007 (the investment bank proffered a low compensation to revenue level of 41%). In addition, 40% of the total variable compensation (close to 60% for managing directors) was in the form of deferred awards that are subject to performance criteria. While this deferred framework may have cost implications further down the line, for now it reinforces Credit Suisse's reputation as the responsible bank.

Digging down into the annual and quarterly figures, it is possible to see a new Credit Suisse emerging. In terms of performance, it is the equities and advisory businesses that are outshining fixed income. Although trading activity slowed across the industry, it fell precipitously at Credit Suisse in the final quarter of last year - most pronounced in the fixed income division, where profits shrank by one-third. The bank's senior management attribute this to its move away from proprietary trading and towards a focus on client business, which slowed dramatically in November and December last year.

In terms of revenues, analysts believe that it is Credit Suisse's equity business where the most upside is likely as the global economy improves. Moreover, they argue that Credit Suisse's fixed income business is much smaller than that of competitors such as Barclays and Deutsche Bank. While it is difficult to compare banks' differently reported numbers, extrapolated data from independent broker Execution Noble suggests that Barclays' fixed income franchise, for example, generated about $20.5bn in 2009, versus $13.1bn at Credit Suisse. One analyst suggested that the bank's capital-light strategy is proving detrimental to its fixed income business, which is much more capital intensive than equities or advisory.

Gaël de Boissard, head of global securities, denies that this is the case, or that Credit Suisse's current fixed income buildout is evidence that the bank's fixed income business is trying to play catch-up. The round of hiring (Credit Suisse is about halfway through a plan to increase its total fixed income headcount by about 300 bankers, largely focused on upgrading its sales and trading effort) is more to do with keeping up with organic growth, says Mr de Boissard. "We are definitely growing that business, but it is a continuation of what has been happening over the past couple of years as our client franchise has grown."

Fresh blood

Mr de Boissard says an analysis of the bank's business revealed that about 50% of the clients in Credit Suisse's fixed income business are new compared to about two years ago. The need to deal with increasing volumes related to that client growth is driving the increase in the sales and trading headcount, as well as in the bank's research offering. For example, he says the bank has seen significant growth in over-the-counter foreign exchange [FX] and rates volumes - bringing it from about 20th place in the FX business into the top 10, and from eighth or ninth in rates to squarely in the top five. "This shows the scale of growth in our client business through the crisis, and the need to increase our sales effort," says Mr de Boissard. "We have to make sure we are in a position to cement the relationships earned during the crisis and ensure we remain a top counterpart to our clients."

Credit Suisse's capital model means that the bank has about one-half to one-third of the risk weighted assets of its competitors, but Mr de Boissard says this in no way constrains the business. He cites the bank's capital-intensive, high-yield debt franchise, which is one of the best in the business, as an example to the contrary.

What it does mean, however, is that the business model is focused on distribution rather than warehousing. "It is entirely consistent with our client-focused strategy and our intention to further invest in sales and trading. As flow increases, our dialogue with clients needs to increase as well. Clients understand exactly what we are trying to do."

Flow growth

While Credit Suisse has nowhere near the size of flow business compared to established flow houses such as Deutsche or Barclays, Mr de Boissard says that it is much bigger than it used to be - and is still growing. "Today, we are one of the biggest fee payers [to brokers] in swaps in Europe, which shows how much we have grown," he says. "We have a very strong flow business in rates: that's clear from the [client] polls. Some of the expansion is about 'reallocation': where people were dealing exotic, yield-curve products, now they are just trading two years and 10 years. The rest is growth in market share during the crisis. At the start of the crisis, we had already established a clear strategy to become a broader player. We weren't targeting market share per se, but we had a number of initiatives that have resulted in a bigger share."

Still, the bank is up against the flow monsters and other banks that are increasingly targeting the sector, including Swiss rival UBS, which is rebuilding its fixed income division with a specific plan to build out the flow space. Is there enough business for everyone to grow?

"Aside from the fact that there are fewer banks out there, there has been a genuine increase in flow business," says Mr de Boissard. "A lot of volume has disappeared from the more complex products but the hedging need has not disappeared; that is now being expressed through flow products and volumes have shot up. Increased competition is sure to change the economics of the business, so there will be more pressure on flow margins this year than last, but that does not prevent it from being a profitable business."

As a result of achieving a better mix across high-yield, commercial mortgage-backed securities, residential mortgage-backed securities, leveraged loans and credit, etc, the bank's fixed income revenue streams are also more resilient than they used to be. "Any of those product areas could have a bad year and it would not be too damaging to the fixed income business, let alone the bank. That would probably not have been true a couple of years ago," says Mr de Boissard.

Were markets to return to the kinds of activity of 2006 or 2007, however, the bank's capital-light strategy could become a hindrance. Mr de Boissard thinks Credit Suisse has got the model right. "If that were the case, then we may have to adjust our strategy; but I think that the markets are moving our way." He suggests that come Basel III, other banks may be caught out. "Our capital-efficient model makes sense over the long term; some other banks may be in for a shock if Basel III comes in tighter than they expect."

In addition, having been clear and decisive about its compensation policy and its business model, it is attracting the right kind of bankers. It has a very stable management team with low levels of staff turnover at the layers below. Bankers may not have liked PAF when it was first introduced, but in retrospect, it looks increasingly clever. "Our bankers have responded well to a coherent strategy. They recognise that the steps we have taken are sensible. New hires do not seem to be put off by our policies. Maybe the clear message we are sending about our framework filters out those seeking purely an economic - rather than a business - model," says Mr de Boissard.

What is clear is that Credit Suisse has carved out its own identity. It has a plan - one that can be adapted as the environment changes - but it will not be changed to copy competitors or for short-term gain. It is playing the long game. "We are not looking at competitors and trying to emulate their strategy. We know our core competencies and our core DNA. It's when firms focus solely on chasing a competitor, rather than viewing the broader landscape, that they can get into trouble. We are executing our own strategy - our primary aim is to help our clients thrive in fixed income."

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