Jonathan Rogers, IFR Chief Analyst
CREDIT SUISSE LOST its Asian bond syndication team last week with the departure from its Hong Kong headquarters of Devesh Ashra and Hital Desai. Their exits were surprising coming as they did in the same week that the Swiss bank priced a US dollar Reg S deal for Kaisa Properties. That might have told you that the firm was still engaged with the business of underwriting bonds in Asia, and trying to keep its primarily high-yield focused franchise chugging along.
But from occupying a position just outside the top 10 of the Thomson Reuters Asia Pacific G3 league tables for the past five years, Credit Suisse has slumped this year to 16th place and in volume terms is a shadow of its former self.
I have no idea why the two gentlemen left the bank, but their departure seems to speak volumes about the current state of investment banking, whether in Asia or elsewhere.
Musical chairs are not uncommon at this time of year when bonuses have been banked and a better offer awaits elsewhere – or when little or no bonus has been paid out, and a banker has received a strong hint that he or she might be better off at another establishment. This time, however, the moves are happening against a radical rethink of the investment banking model, and nowhere is this more true than at Credit Suisse.
HAVING CARVED OUT its investment banking operations from its wealth management business at the end of last year, Credit Suisse went on to shed headcount in its Asian IB franchise dramatically, culling the sales and trading business in a clear indication of where its priorities lie. The move came alongside the bloodbath at Swiss banking peer UBS, which announced plans to let go around 10,000 staff at the end of last year and declared its intention to focus the business on wealth management and shrink investment banking.
At the time of the reorganisation Brady Dougan, Credit Suisse’s CEO, declared the bank’s intention to remain in competition with the likes of Goldman Sachs and JP Morgan, via cutting costs and winning market share in the face of retrenchment from a raft of rival firms. Numerous analysts were sceptical that this approach would deliver a decent return to shareholders and the whispering was that Credit Suisse would eventually be forced to take the radical measures dished out by its Swiss counterpart.
That may yet come to pass, but it doesn’t look as if its Asian primary credit operation is going to be adding much to the bottom line any time soon, at least if an empty syndicate desk is anything to go by.
EVERYTHING COMES DOWN to beating the cost of capital, and that cost is rising in Switzerland more than anywhere else. Last year, Credit Suisse was told by the Swiss National Bank it was under-capitalised, forcing it to go out and raise US$16.5bn via convertible and hybrid issuance with the aim of hitting a 10% core capital ratio this year. In the meantime it reduced risk-weighted assets on the investment bank’s balance sheet by US$90bn. And Dougan declared a target of 15% return on equity over the medium term.
Asia is witnessing a once-in-a-generation explosion of private wealth
Will the underwriting, selling and trading of bonds out of Asia help hit that target? I wonder. I imagine that UBS’s focus on the private banking and wealth management aspects of its business is a view shared by Credit Suisse as well. After all, why sit on the knife edge of assessing the right level of daily value at risk at your trading operations in the face of hair-raising market volatility when you can sell products to rich private customers for a juicy commission?
Nowhere is this more true than in Asia, which is witnessing a once-in-a-generation explosion of private wealth. Private banking in the region might be competitive, but under a marquee brand such as Credit Suisse it’s a little easier than it is for most. The ranks of Asia’s billionaires remain in thrall to the mystique – however stodgy and dull its foundations might be – of having your money managed by a Swiss bank. And there are more high-net-worth individuals in Asia than there are in the US, with the total number of rich Asians having surpassed the total of rich Americans back in 2011.
And let’s be clear, selling bonds to the average client of an Asia-based private bank isn’t exactly rocket science. In a blog last week my colleague Nachum Kaplan compared private banks to the “stuffees” in a syndicated loan, and I’m pretty sure that’s spot on when it comes to recent activity in Asia’s G3 bond market.
You offer them leverage on which you charge a fair whack, get a rebate from the bookrunners for buying the stuff they’re flogging, and charge a commission on the buy and the sell. Easy money. Small wonder the private bank bid for new issues is so gargantuan and so flaky, with the flipping of new issues the order of the day, driven as much by commission-hungry wealth managers as it is by customers looking to make a quick buck.
I’m told Credit Suisse isn’t rushing to replace the departed syndicate deskers. As its business model looks increasingly to the high-net-worth individual for profit, I’m not in the least surprised.
