netrashetty
Netra Shetty
Credit Suisse Group (NYSE:CS) is one of the world's leading banking institutions and is the sixth largest wealth management firm in the world in terms of assets under management with $612 billion.[1] The Swiss firm advises corporations on mergers and acquisitions, facilitates client equity and fixed income trading, manages assets for institutional investors and engages in both long-term (private equity) and short-term investments (propriety trading).
The core businesses reported a 3rd quarter net profit of CHF1,026 million, primarily driven by Private Banking and Asset Management revenues offsetting weak Investment Banking revenues and even weaker Equities sales and trading revenues.
Business Model
The Credit Suisse Group serves clients around the world through three divisions: investment banking, private banking, and asset management. Credit Suisse promotes client cross-referrals across the company by having the three divisions operate under the Credit Suisse brand name. Their clients can include individuals, institutions, and corporations.
2009 Net Revenue Breakdown by Segment[2]
Investment Banking (61.1% of 2009 Net Revenue)[2]
Credit Suisse's investment bank operates in 57 locations and 26 countries and is employed by clients running the gamut from large corporations to governments to financial institutions. Credit Suisse offers a wide range of financial services, including debt and equity underwriting, mergers and acquisitions (M&A), sales and trading, divestitures, and investment research.
Contents
1 Business Model
1.1 Investment Banking (61.1% of 2009 Net Revenue)[2]
1.2 Private Banking (34.7% of 2009 Net Revenue)[2]
1.2.1 Wealth Management
1.2.2 Corporate & Retail Banking
1.3 Asset Management (5.4% of 2009 Net Revenue)[2]
1.4 Centers of Exellence
2 Trends and Forces
2.1 Impact of Basel III Rules on Big Banks
2.2 Passing European Stress Test Test Creates Positive Sentiment for Banks
2.3 Global economic growth expands market for CS
2.4 Emerging Markets offers growth and access to new clients
2.5 Macroeconomic Factors
2.5.1 Housing Market
2.5.2 Benefit from low interest rates
2.5.3 Benefits of Changes in Tax Law
2.6 Government Regulation
2.6.1 Obama's Bank Plan Restricts Banks' Profit Potential
3 Competitors
4 References
In 2009, CS's investment banking segment reported record income before taxes of CHF 6,895 million and record net revenues of CHF 20,537 million due to strong results in key client businesses including global rates and foreign exchange, cash equities, US RMBS secondary trading and prime services. The segment contributed to 61.1% of total net revenue for the company in 2009.[3]
In the 3rd quarter of 2010, investment banking pre-tax profits amounted to CHF 395 million. Fixed income sales and trading revenues were CHF 1.5 billion. Equities sales and trading were CHF 1.1 billion. All amounts missed analyst forecasts. Revenues for the division decreased; however, costs did not with a compensation ratio of 55%.
The growth achieved by CS's Investment Banking division is highlighted by its ranking in 2010 as number one in announced M&A in the Americas and number three globally. CS is also ranked in the top five in global equity and underwriting and number two in Europe, Middle East, Africa, as well as top five globally in investment grade and high yield underwriting and number one in emerging markets underwriting and advisory.[4][5]
Private Banking (34.7% of 2009 Net Revenue)[2]
Credit Suisse's private banking operations are split into two subdivisions: wealth management and corporate & retail banking. Credit Suisse is the second-largest wealth management firm in the world and a leader in corporate & retail banking in Switzerland. In total, the Private Banking division accounted for 34.7% of net revenue in 2009 and 32.36% of net revenue in the first quarter of 2010. Total operating expenses rose 8% compared to 1Q2009, which included captive insurance settlement proceeds of CHF 100 million. The segment recorded CHF 18.6 billion of net new assets in 1Q2010 with especially strong inflows from Swiss and emerging markets clients. [4]
In the 3rd quarter of 2010, net interest income for the division amounted to CHF 836 million, beating analyst expectations. However, the division experienced a 6% decrease in net revenues to CHF 2,826 million, mainly due to lower brokerage fees, while total operating expenses decreased 6%. Gross revenue margin was 118bps with net new money flows of 6.2%.
The division recorded strong net new assets of CHF 12.6 billion in the 3rd quarter. Wealth management clients contributed net new assets of CHF 12.4 billion benefiting from substantial inflows in international businesses, including strong contributions from emerging markets.
Wealth Management
With 160 offices worldwide, including approximately 80 located in Switzerland, Credit Suisse offers a range of wealth management services to fit the needs of high net worth individuals around the globe. The bank's products and services include pension planning, life insurance products, inheritance advice, and tax planning. Credit Suisse's comprehensive advisory system includes both asset and liability management.
Credit Suisse Group's wealth management subdivision also includes an integrated independent private bank, Clariden Leu, which serves high net worth clients in Switzerland and 17 other countries. The division reported pre-tax income of CHF 612 million in the 3rd quarter of 2010, a decrease of 3% from the 2nd quarter due to a 5% decrease in net revenues, 4% decrease in recurring revenues reflecting a decrease in net interest income and lower recurring commissions. Transaction-based revenues declined 9% mainly due to lower brokerage fees and foreign exchange income from client transactions, reflecting seasonal slowdown and low client activity. Gross margin was 118 bps, 2 bps down from the 2nd quarter.
Corporate & Retail Banking
In Switzerland, Credit Suisse serves its corporate and retail banking clients with 215 banking branches throughout the country. An online network allows clients to access and manage their accounts securely from any location, at any time. Corporate advising services for small and medium-sized corporate clients are available at over 40 of Credit Suisse's branch offices, and advising for large corporate clients is centered in two regional offices. Credit Suisse also offers consumer finance services through BANK-now, which supplies individual clients in Switzerland with private credit offerings and car leasing.
In the 3rd quarter of 2010, the division reported pre-tax income of CHF 224 million, a 7% decrease from the 2nd quarter. Net revenues declined 7% from the 2nd quarter as well reflecting a 5% decline in net interest income and 12% lower non-interest income. The decrease in net interest income mainly reflected lower loan margins on slightly lower average volumes and deposit margins on stable average volumes. Non-interest income declined to CHF 153 million as fair value losses related to Clock Finance, a synthetic collateralized loan portfolio.
Asset Management (5.4% of 2009 Net Revenue)[2]
Credit Suisse's asset management division operates in more than 20 offices in 19 countries. Relationship managers are assigned to specific clients, and are responsible for proposing and implementing investment solutions. Clients range from institutional and individual investors to governments and corporations. Products and services in the asset management division include investments in fixed income (investments that offer a fixed, predetermined rate of return, such as bonds and money market instruments, including U.S. Treasury bills and U.S. government bonds), equities, and alternative investments.
Credit Suisse has been reorganizing its asset management business to focus on alternative investments. These alternative investments include real estate, hedge funds, private equity, and volatility management. Credit Suisse engages in both in-house and joint asset management ventures with other firms. In the 3rd quarter in 2010, pre-tax income was CHF 135 million with net revenues of CHF 582 million, a 16% increase over the 2nd quarter, reflecting higher investment-related gains and increased fee-based revenues driven by higher performance fees and carried interest. Income from equity participations declined, reflecting a loss from reduction in ownership interest in Aberdeen by .9% to 21.0%.
On August 9, 2010, Credit Suisse announced plans to spin off its DLJ Real Estate Capital Partners RECP to managers of the property funds. The transaction is set to close in the third quarter of 2010. Afterwards, RECP will be run by Managing Partner Andrew Rifkin. RECP manages "global opportunistic" funds which include portfolios of alternative assets such as real estate. The spin off is part of CS's plan to cut real estate holdings after the financial crisis drove values down.[6]
In the 3rd quarter, the division agreed to acquire a significant controlling interest in York Capital Management, a leading global-event driven hedge fund manager, with the transaction expected to closing in the 4th quarter. The acquisition was part of the implementation of CS's strategy to focus on higher margin, capital-efficient businesses able to leverage its global platform.
On Dec 27, Reuters reported that a private equity firm Apollo Management is buying a $2.8 billion portfolio of commercial real estate loans from Credit Suisse Group AG for $1.2 billion. Credit Suisse is providing Apollo with debt financing for the deal, the paper reported, adding that the bank has already written down the portfolio to well below its face value.[7]
Centers of Exellence
Credit Suisse has also taken a step to streamline its operation in the increasingly global market. It has opened four centers of excellency that support the business office in New York. The centers are located in the following cities: Raleigh, North Carolina; Pune, India; Wroclaw, Poland; Downtown Core, Singapore. The roles of the centers range from analytics, finance, product control, IT, and operations. The centers have experienced rapid growth in both number of employees as well as support functions offered. Credit Suisse hopes to leverage its talent worldwide to provide superior and immediate support to its business functions.
Annual Financial Data, in millions CHF 2005[8] 2006[8] 2007[8] 2008[2] 2009[2]
Net Interest Income $6,539 $5.969 $7,610 $8,536 $6,891
Provision for Credit Losses ($134) ($97) $227 $813 $506
Net fee & Commission Income $13,273 $16,379 $17,922 $14,812 $13,750
Net Trading Income $5,693 $9,162 $5,806 ($9,880) $12,151
Total Net Income $3,575 $7,020 $6,314 ($10,837) $6,411
Trends and Forces
Impact of Basel III Rules on Big Banks
The Basel Committee on Banking Supervision announced new regulations which ultimately will force banks to have 10.5% of total capital on hand against liabilities. The new rules are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans. Requiring banks to hold more capital on hand will limit the amount of money they can lend out, but also reduce the risk of insolvency given many loan defaults.
Under the new regulations, the mandatory Tier 1 capital reserve would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019. Banks would also be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent. Ultimately, the amount of rock-solid reserves each bank is expected to have will amount to 8.5 percent of assets. Also, the rules eliminate the ability to count deferred tax assets, some mortgage servicing rights and trust preferred securities as assets.
The potential impact of the regulations on US banks is rather limited because as of September 2010, 61 of 62 US banks with assets of more than $10 billion meet the requirements, therefore, banks such as Morgan Stanley, Goldman Sachs Group (GS), J P Morgan Chase (JPM), and Citigroup (C) will not see their businesses change with the passing of these rules.
Some major European banks, specifically Switzerland's two largest UBS and Credit Suisse, may face additional requirements because of the their immense to the Swiss economy and the possible harm a collapse would pose to the country.
The rules must still be presented to the leaders of the Group of 20 rich and developing nations at a meeting in November 2010 before they can be ratified by national governments, but the general consensus is that these rules will pass.[9]
Passing European Stress Test Test Creates Positive Sentiment for Banks
On July 7, 2010, the Committee of European Bank Supervisors (CEBS) outlined a stress test that simulated the impact of a severe economic shock on 91 banks in the euro zone, Great Britain, Sweden and Denmark. European banks were given stress templates on July 6 and delivered their answers on July 15. The stress tests outlined scenarios which simulated the banks undergoing a recession and a decline in the value of the government bond holdings.
On July 22, 2010, the results of the stress test were released in which 84 of the 91 banks passed the test, including Credit Suisse. No systematically important bank failed. Positive and sentiment and optimism should stem from the positive results of the stress tests, creating greater consumer and investor confidence in these banks. Such optimism would lower risk premiums on european government and corporate bonds as well as increase european bank stock prices.[10]
Global economic growth expands market for CS
Global gross domestic product (GDP) increased by an estimated 4.9% over the course of 2007.[11] As the world economy as a whole expands, consumers and firms have more wealth to spend and invest, which translates into increased demand for financial services like those offered by Credit Suisse. The strength of the world economy has promoted quicker recovery in Western Europe, which benefits Credit Suisse in the form of higher revenues from net capital inflows, as well as inter-generational wealth transfers, which will boost the revenue generated by the inheritance planning services of Credit Suisse's private banking division.
CS has since expanded by providing financial advisory services to countries with higher economic growth, such as:
In Latin America, Credit Suisse has acquired a majority interest in Hedging-Griffo, one of the largest asset management and private banking firms in Brazil.
In Moscow, Russia, CS initiated an onshore wealth management business to complement the existing investment banking business there.
In the Middle East, CS expanded its onshore activities in Lebanon and Qatar to offer a full range of investment advisory services and products.
Emerging Markets offers growth and access to new clients
Credit Suisse's presence overseas is large and growing: Investment banking is well positioned to benefit from the increasing importance of these markets to the global economy, as well as their rapid growth and high profit potential. Capital investments tend to be subject to diminishing marginal returns, meaning that the more capital that has been invested in an economy, the smaller the benefit of additional capital investment will be. Since emerging markets typically have very small capital stocks, capital investment has the potential to be extremely lucrative.
In India, CS obtained banking licenses in November of 2010 from the Indian Central Bank to be able to open branches in India to accept deposits and to offer financial services such as derivatives and advisory services.[12]
In South Africa, Credit Suisse partnered with Standard Bank to expand its equities business. This partnership gives CS's clients access to the South African equities market, which is a component of many emerging market indices.
In China, CS helped facilitate the IPO's of the Industrial and Commercial Bank of China Limited, China's leading commercial bank, and China Construction Bank. The latter was the world's largest IPO in 2005. In addition, Credit Suisse won regulatory approval to set up a joint venture with Founder Securities in China. Under the terms of the deal, Credit Suisse will be able to underwrite debt and equities offerings in China's domestic capital markets.[13]
Macroeconomic Factors
Housing Market
Investment banks, particularly those with significant mortgage securitization practices, are very sensitive to the residential real estate market. Mortgage-backed securitization (MBS) is the bundling of mortgages for sale to third parties. When the housing market goes down, the value of the underlying mortgages backing these securities falls as well. Moreover, the overall number of mortgages also decreases.
Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of real estate are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Morgan Stanley.
Benefit from low interest rates
Interest rates can be thought of as the cost of borrowing money, as interest rates increase, businesses are less likely to issue debt or equity given that the price of borrowing has increased, which dampens the overall demand for mortgages and other home loan products. The lowering of the U.S. Federal Funds Rate should, in theory, help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates. The Fed has been consistently lowering rates since 2007. For example, in July 2009 it was 0.5%, compared to 2% in July 2008 and 5.25% in September 2007.[14][15] Additionally, economic uncertainty in Europe and the U.K. has led the UK central bank to lower its rate from 5% in July 2008 to 0.5% in July 2009.[16]
CS stands to benefit from lower interest rates since they can afford to lend out more money. By lending more money, CS can collect interest on its loans.
Benefits of Changes in Tax Law
Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Newly proposed fiscal legislative reform for 2011, which will effectively increase the capital gains tax paid by private equity firms and other money managers from 15% to between 20% and 30%. This tax increase creates incentives for such firms to exit their profitable positions and move to launch initial public offerings (IPO) before the change in tax law takes effect in 2011. This is increase in IPO activity directly translates into an increase in fee for investment banks handling the private equity IPO deals.[17]
Government Regulation
Obama's Bank Plan Restricts Banks' Profit Potential
United States President Barack Obama presented a plan on January 21, 2010 to restrict the activities of commercial banks, specifically outlawing proprietary trading and preventing commercial banks and institutions that own banks from owning, investing in or sponsoring private equity and hedge funds.[18] The Obama administration also plans to limit the ability of the largest banks to use borrowed money to fund expansion plans, which calls for an expansion of a 1994 law that forbids banks from acquiring another bank if the deal would give the bank more than 10% of the nation's insured deposits.[19]
Such legislation is intended to reduce speculative activity by financial institution in order to avoid future financial crises similar to the 2008 Financial Crisis; however, Obama's plan also has the effect of slowing economic recovery by limiting banks' ability to generate earnings as well as limiting investment in private equity deals and funds. U.S. banks make immense contributions to the buyout sector and have raised 60 funds since 2006, with a total value exceeding $80 billion. Such investments are crucial to driving economic growth and development, which will be greatly hindered with the imposition of such limits on the investment activities of major banks such as Credit Suisse. Since U.S. banks also manage more than $180 billion in hedge funds of funds subsidiaries, any restriction on banks' management of funds would affect hundred of hedge funds worldwide, which generate profits from such funds of funds.[18]
Competitors
Global M&A market share for the first 7 months of 2010[20]
Credit Suisse Group is one of the world's largest banking institutions. Its private bank is the most profitable in the world, which includes the world's second largest wealth management business. Credit Suisse also competes with investment banks for M&A advisory and debt and equity underwriting services. In the first 7 months of 2010, Credit Suisse came in 2nd just behind Goldman Sachs Group (GS) in terms of the value of the completed mergers and acquisitions it advised.
Credit Suisse competes with other banks across private and investment banking and may compete with more than one division (i.e. JP Morgan and Bank of America compete across private and investment banking). Some of Credit Suisse's competitors include:
Private Banking
J P Morgan Chase (JPM)
Bank of America (BAC)
Citigroup (C)
Deutsche Bank AG (DB)
Investment Banking
UBS AG (UBS)
Lazard (LAZ)
Morgan Stanley (MS)
Goldman Sachs Group (GS)
The core businesses reported a 3rd quarter net profit of CHF1,026 million, primarily driven by Private Banking and Asset Management revenues offsetting weak Investment Banking revenues and even weaker Equities sales and trading revenues.
Business Model
The Credit Suisse Group serves clients around the world through three divisions: investment banking, private banking, and asset management. Credit Suisse promotes client cross-referrals across the company by having the three divisions operate under the Credit Suisse brand name. Their clients can include individuals, institutions, and corporations.
2009 Net Revenue Breakdown by Segment[2]
Investment Banking (61.1% of 2009 Net Revenue)[2]
Credit Suisse's investment bank operates in 57 locations and 26 countries and is employed by clients running the gamut from large corporations to governments to financial institutions. Credit Suisse offers a wide range of financial services, including debt and equity underwriting, mergers and acquisitions (M&A), sales and trading, divestitures, and investment research.
Contents
1 Business Model
1.1 Investment Banking (61.1% of 2009 Net Revenue)[2]
1.2 Private Banking (34.7% of 2009 Net Revenue)[2]
1.2.1 Wealth Management
1.2.2 Corporate & Retail Banking
1.3 Asset Management (5.4% of 2009 Net Revenue)[2]
1.4 Centers of Exellence
2 Trends and Forces
2.1 Impact of Basel III Rules on Big Banks
2.2 Passing European Stress Test Test Creates Positive Sentiment for Banks
2.3 Global economic growth expands market for CS
2.4 Emerging Markets offers growth and access to new clients
2.5 Macroeconomic Factors
2.5.1 Housing Market
2.5.2 Benefit from low interest rates
2.5.3 Benefits of Changes in Tax Law
2.6 Government Regulation
2.6.1 Obama's Bank Plan Restricts Banks' Profit Potential
3 Competitors
4 References
In 2009, CS's investment banking segment reported record income before taxes of CHF 6,895 million and record net revenues of CHF 20,537 million due to strong results in key client businesses including global rates and foreign exchange, cash equities, US RMBS secondary trading and prime services. The segment contributed to 61.1% of total net revenue for the company in 2009.[3]
In the 3rd quarter of 2010, investment banking pre-tax profits amounted to CHF 395 million. Fixed income sales and trading revenues were CHF 1.5 billion. Equities sales and trading were CHF 1.1 billion. All amounts missed analyst forecasts. Revenues for the division decreased; however, costs did not with a compensation ratio of 55%.
The growth achieved by CS's Investment Banking division is highlighted by its ranking in 2010 as number one in announced M&A in the Americas and number three globally. CS is also ranked in the top five in global equity and underwriting and number two in Europe, Middle East, Africa, as well as top five globally in investment grade and high yield underwriting and number one in emerging markets underwriting and advisory.[4][5]
Private Banking (34.7% of 2009 Net Revenue)[2]
Credit Suisse's private banking operations are split into two subdivisions: wealth management and corporate & retail banking. Credit Suisse is the second-largest wealth management firm in the world and a leader in corporate & retail banking in Switzerland. In total, the Private Banking division accounted for 34.7% of net revenue in 2009 and 32.36% of net revenue in the first quarter of 2010. Total operating expenses rose 8% compared to 1Q2009, which included captive insurance settlement proceeds of CHF 100 million. The segment recorded CHF 18.6 billion of net new assets in 1Q2010 with especially strong inflows from Swiss and emerging markets clients. [4]
In the 3rd quarter of 2010, net interest income for the division amounted to CHF 836 million, beating analyst expectations. However, the division experienced a 6% decrease in net revenues to CHF 2,826 million, mainly due to lower brokerage fees, while total operating expenses decreased 6%. Gross revenue margin was 118bps with net new money flows of 6.2%.
The division recorded strong net new assets of CHF 12.6 billion in the 3rd quarter. Wealth management clients contributed net new assets of CHF 12.4 billion benefiting from substantial inflows in international businesses, including strong contributions from emerging markets.
Wealth Management
With 160 offices worldwide, including approximately 80 located in Switzerland, Credit Suisse offers a range of wealth management services to fit the needs of high net worth individuals around the globe. The bank's products and services include pension planning, life insurance products, inheritance advice, and tax planning. Credit Suisse's comprehensive advisory system includes both asset and liability management.
Credit Suisse Group's wealth management subdivision also includes an integrated independent private bank, Clariden Leu, which serves high net worth clients in Switzerland and 17 other countries. The division reported pre-tax income of CHF 612 million in the 3rd quarter of 2010, a decrease of 3% from the 2nd quarter due to a 5% decrease in net revenues, 4% decrease in recurring revenues reflecting a decrease in net interest income and lower recurring commissions. Transaction-based revenues declined 9% mainly due to lower brokerage fees and foreign exchange income from client transactions, reflecting seasonal slowdown and low client activity. Gross margin was 118 bps, 2 bps down from the 2nd quarter.
Corporate & Retail Banking
In Switzerland, Credit Suisse serves its corporate and retail banking clients with 215 banking branches throughout the country. An online network allows clients to access and manage their accounts securely from any location, at any time. Corporate advising services for small and medium-sized corporate clients are available at over 40 of Credit Suisse's branch offices, and advising for large corporate clients is centered in two regional offices. Credit Suisse also offers consumer finance services through BANK-now, which supplies individual clients in Switzerland with private credit offerings and car leasing.
In the 3rd quarter of 2010, the division reported pre-tax income of CHF 224 million, a 7% decrease from the 2nd quarter. Net revenues declined 7% from the 2nd quarter as well reflecting a 5% decline in net interest income and 12% lower non-interest income. The decrease in net interest income mainly reflected lower loan margins on slightly lower average volumes and deposit margins on stable average volumes. Non-interest income declined to CHF 153 million as fair value losses related to Clock Finance, a synthetic collateralized loan portfolio.
Asset Management (5.4% of 2009 Net Revenue)[2]
Credit Suisse's asset management division operates in more than 20 offices in 19 countries. Relationship managers are assigned to specific clients, and are responsible for proposing and implementing investment solutions. Clients range from institutional and individual investors to governments and corporations. Products and services in the asset management division include investments in fixed income (investments that offer a fixed, predetermined rate of return, such as bonds and money market instruments, including U.S. Treasury bills and U.S. government bonds), equities, and alternative investments.
Credit Suisse has been reorganizing its asset management business to focus on alternative investments. These alternative investments include real estate, hedge funds, private equity, and volatility management. Credit Suisse engages in both in-house and joint asset management ventures with other firms. In the 3rd quarter in 2010, pre-tax income was CHF 135 million with net revenues of CHF 582 million, a 16% increase over the 2nd quarter, reflecting higher investment-related gains and increased fee-based revenues driven by higher performance fees and carried interest. Income from equity participations declined, reflecting a loss from reduction in ownership interest in Aberdeen by .9% to 21.0%.
On August 9, 2010, Credit Suisse announced plans to spin off its DLJ Real Estate Capital Partners RECP to managers of the property funds. The transaction is set to close in the third quarter of 2010. Afterwards, RECP will be run by Managing Partner Andrew Rifkin. RECP manages "global opportunistic" funds which include portfolios of alternative assets such as real estate. The spin off is part of CS's plan to cut real estate holdings after the financial crisis drove values down.[6]
In the 3rd quarter, the division agreed to acquire a significant controlling interest in York Capital Management, a leading global-event driven hedge fund manager, with the transaction expected to closing in the 4th quarter. The acquisition was part of the implementation of CS's strategy to focus on higher margin, capital-efficient businesses able to leverage its global platform.
On Dec 27, Reuters reported that a private equity firm Apollo Management is buying a $2.8 billion portfolio of commercial real estate loans from Credit Suisse Group AG for $1.2 billion. Credit Suisse is providing Apollo with debt financing for the deal, the paper reported, adding that the bank has already written down the portfolio to well below its face value.[7]
Centers of Exellence
Credit Suisse has also taken a step to streamline its operation in the increasingly global market. It has opened four centers of excellency that support the business office in New York. The centers are located in the following cities: Raleigh, North Carolina; Pune, India; Wroclaw, Poland; Downtown Core, Singapore. The roles of the centers range from analytics, finance, product control, IT, and operations. The centers have experienced rapid growth in both number of employees as well as support functions offered. Credit Suisse hopes to leverage its talent worldwide to provide superior and immediate support to its business functions.
Annual Financial Data, in millions CHF 2005[8] 2006[8] 2007[8] 2008[2] 2009[2]
Net Interest Income $6,539 $5.969 $7,610 $8,536 $6,891
Provision for Credit Losses ($134) ($97) $227 $813 $506
Net fee & Commission Income $13,273 $16,379 $17,922 $14,812 $13,750
Net Trading Income $5,693 $9,162 $5,806 ($9,880) $12,151
Total Net Income $3,575 $7,020 $6,314 ($10,837) $6,411
Trends and Forces
Impact of Basel III Rules on Big Banks
The Basel Committee on Banking Supervision announced new regulations which ultimately will force banks to have 10.5% of total capital on hand against liabilities. The new rules are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans. Requiring banks to hold more capital on hand will limit the amount of money they can lend out, but also reduce the risk of insolvency given many loan defaults.
Under the new regulations, the mandatory Tier 1 capital reserve would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019. Banks would also be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent. Ultimately, the amount of rock-solid reserves each bank is expected to have will amount to 8.5 percent of assets. Also, the rules eliminate the ability to count deferred tax assets, some mortgage servicing rights and trust preferred securities as assets.
The potential impact of the regulations on US banks is rather limited because as of September 2010, 61 of 62 US banks with assets of more than $10 billion meet the requirements, therefore, banks such as Morgan Stanley, Goldman Sachs Group (GS), J P Morgan Chase (JPM), and Citigroup (C) will not see their businesses change with the passing of these rules.
Some major European banks, specifically Switzerland's two largest UBS and Credit Suisse, may face additional requirements because of the their immense to the Swiss economy and the possible harm a collapse would pose to the country.
The rules must still be presented to the leaders of the Group of 20 rich and developing nations at a meeting in November 2010 before they can be ratified by national governments, but the general consensus is that these rules will pass.[9]
Passing European Stress Test Test Creates Positive Sentiment for Banks
On July 7, 2010, the Committee of European Bank Supervisors (CEBS) outlined a stress test that simulated the impact of a severe economic shock on 91 banks in the euro zone, Great Britain, Sweden and Denmark. European banks were given stress templates on July 6 and delivered their answers on July 15. The stress tests outlined scenarios which simulated the banks undergoing a recession and a decline in the value of the government bond holdings.
On July 22, 2010, the results of the stress test were released in which 84 of the 91 banks passed the test, including Credit Suisse. No systematically important bank failed. Positive and sentiment and optimism should stem from the positive results of the stress tests, creating greater consumer and investor confidence in these banks. Such optimism would lower risk premiums on european government and corporate bonds as well as increase european bank stock prices.[10]
Global economic growth expands market for CS
Global gross domestic product (GDP) increased by an estimated 4.9% over the course of 2007.[11] As the world economy as a whole expands, consumers and firms have more wealth to spend and invest, which translates into increased demand for financial services like those offered by Credit Suisse. The strength of the world economy has promoted quicker recovery in Western Europe, which benefits Credit Suisse in the form of higher revenues from net capital inflows, as well as inter-generational wealth transfers, which will boost the revenue generated by the inheritance planning services of Credit Suisse's private banking division.
CS has since expanded by providing financial advisory services to countries with higher economic growth, such as:
In Latin America, Credit Suisse has acquired a majority interest in Hedging-Griffo, one of the largest asset management and private banking firms in Brazil.
In Moscow, Russia, CS initiated an onshore wealth management business to complement the existing investment banking business there.
In the Middle East, CS expanded its onshore activities in Lebanon and Qatar to offer a full range of investment advisory services and products.
Emerging Markets offers growth and access to new clients
Credit Suisse's presence overseas is large and growing: Investment banking is well positioned to benefit from the increasing importance of these markets to the global economy, as well as their rapid growth and high profit potential. Capital investments tend to be subject to diminishing marginal returns, meaning that the more capital that has been invested in an economy, the smaller the benefit of additional capital investment will be. Since emerging markets typically have very small capital stocks, capital investment has the potential to be extremely lucrative.
In India, CS obtained banking licenses in November of 2010 from the Indian Central Bank to be able to open branches in India to accept deposits and to offer financial services such as derivatives and advisory services.[12]
In South Africa, Credit Suisse partnered with Standard Bank to expand its equities business. This partnership gives CS's clients access to the South African equities market, which is a component of many emerging market indices.
In China, CS helped facilitate the IPO's of the Industrial and Commercial Bank of China Limited, China's leading commercial bank, and China Construction Bank. The latter was the world's largest IPO in 2005. In addition, Credit Suisse won regulatory approval to set up a joint venture with Founder Securities in China. Under the terms of the deal, Credit Suisse will be able to underwrite debt and equities offerings in China's domestic capital markets.[13]
Macroeconomic Factors
Housing Market
Investment banks, particularly those with significant mortgage securitization practices, are very sensitive to the residential real estate market. Mortgage-backed securitization (MBS) is the bundling of mortgages for sale to third parties. When the housing market goes down, the value of the underlying mortgages backing these securities falls as well. Moreover, the overall number of mortgages also decreases.
Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of real estate are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Morgan Stanley.
Benefit from low interest rates
Interest rates can be thought of as the cost of borrowing money, as interest rates increase, businesses are less likely to issue debt or equity given that the price of borrowing has increased, which dampens the overall demand for mortgages and other home loan products. The lowering of the U.S. Federal Funds Rate should, in theory, help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates. The Fed has been consistently lowering rates since 2007. For example, in July 2009 it was 0.5%, compared to 2% in July 2008 and 5.25% in September 2007.[14][15] Additionally, economic uncertainty in Europe and the U.K. has led the UK central bank to lower its rate from 5% in July 2008 to 0.5% in July 2009.[16]
CS stands to benefit from lower interest rates since they can afford to lend out more money. By lending more money, CS can collect interest on its loans.
Benefits of Changes in Tax Law
Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Newly proposed fiscal legislative reform for 2011, which will effectively increase the capital gains tax paid by private equity firms and other money managers from 15% to between 20% and 30%. This tax increase creates incentives for such firms to exit their profitable positions and move to launch initial public offerings (IPO) before the change in tax law takes effect in 2011. This is increase in IPO activity directly translates into an increase in fee for investment banks handling the private equity IPO deals.[17]
Government Regulation
Obama's Bank Plan Restricts Banks' Profit Potential
United States President Barack Obama presented a plan on January 21, 2010 to restrict the activities of commercial banks, specifically outlawing proprietary trading and preventing commercial banks and institutions that own banks from owning, investing in or sponsoring private equity and hedge funds.[18] The Obama administration also plans to limit the ability of the largest banks to use borrowed money to fund expansion plans, which calls for an expansion of a 1994 law that forbids banks from acquiring another bank if the deal would give the bank more than 10% of the nation's insured deposits.[19]
Such legislation is intended to reduce speculative activity by financial institution in order to avoid future financial crises similar to the 2008 Financial Crisis; however, Obama's plan also has the effect of slowing economic recovery by limiting banks' ability to generate earnings as well as limiting investment in private equity deals and funds. U.S. banks make immense contributions to the buyout sector and have raised 60 funds since 2006, with a total value exceeding $80 billion. Such investments are crucial to driving economic growth and development, which will be greatly hindered with the imposition of such limits on the investment activities of major banks such as Credit Suisse. Since U.S. banks also manage more than $180 billion in hedge funds of funds subsidiaries, any restriction on banks' management of funds would affect hundred of hedge funds worldwide, which generate profits from such funds of funds.[18]
Competitors
Global M&A market share for the first 7 months of 2010[20]
Credit Suisse Group is one of the world's largest banking institutions. Its private bank is the most profitable in the world, which includes the world's second largest wealth management business. Credit Suisse also competes with investment banks for M&A advisory and debt and equity underwriting services. In the first 7 months of 2010, Credit Suisse came in 2nd just behind Goldman Sachs Group (GS) in terms of the value of the completed mergers and acquisitions it advised.
Credit Suisse competes with other banks across private and investment banking and may compete with more than one division (i.e. JP Morgan and Bank of America compete across private and investment banking). Some of Credit Suisse's competitors include:
Private Banking
J P Morgan Chase (JPM)
Bank of America (BAC)
Citigroup (C)
Deutsche Bank AG (DB)
Investment Banking
UBS AG (UBS)
Lazard (LAZ)
Morgan Stanley (MS)
Goldman Sachs Group (GS)