February 14, 2018 / 1:33 PM / 3 months ago

Credit Suisse trading benefits from volatility

LONDON, Feb 14 (IFR) - Credit Suisse’s global markets business has benefited from the recent bout of volatility, seeing net revenues rise 10% in the first six weeks of the year from a year earlier, but the Swiss lender reported a steep fourth-quarter net loss due to US tax reforms.

Its Asia-Pacific markets business, which is run separately, has done even better, seeing a 15% rise since the start of the year.

Chief executive Tidjane Thiam said the swings in the market were a good test of whether its secondary trading arm had maintained market share despite several years of restructuring during quieter times.

“We are up on a strong quarter a year ago. This shows we have restructured without losing market share,” he said. “These market conditions are an important test to see if our franchise has been hit by the restructuring or not. Our franchise is still intact.”

The Swiss bank gave the update when issuing fourth-quarter figures, which showed global markets adjusted revenues down 5% at US$1.2bn against the equivalent quarter in 2016.

Fixed income sales and trading revenues were down 3% at SFr547m (US$613m), better than most, but equities was off by 27% at SFr378m, far worse than others. Equities trading had been heightened around the US election in 2016. In Asia-Pacific equities trading revenues were a little better, down only 13% to SFr236m. Fixed income trading in the region was down 28% to a miserable SFr23m.

Persistent low volumes and volatility were blamed for the “challenging trading conditions” seen in its international trading solutions business during the period.

The latter unit is a relatively new initiative bringing in elements of the group’s markets activities as well as its international wealth management and Swiss banking arms.

It essentially uses market expertise to try to sell private clients structured products. These, alongside equity derivatives and securitised products, were responsible for the strong start to the current year.

Thiam dismissed concerns that the bank had been affected by the closure of XIV, its exchange traded notes product designed to short the VIX. When volatility returned in the first week of February, that led to losses of 80% for holders of the product and the bank has now closed it.

“It generates SFr10m in revenues each year so it is not material for us,” he said, adding that the product had come with more than adequate risk warnings. “The prospectus warns it is not suitable for those holding the notes for longer than one day and that the expected long-term value is zero.”

Thiam was more concerned that the volatility was restricting activity by issuers. He said the turmoil had “negatively impacted our primary calendar” with “clients wait for calmer markets in order to transact”.

That has delayed the progress seen in the fourth quarter, which the bank reckoned was its busiest three months in three years for revenues from IPO underwriting.

Total equity capital markets revenues were up 23% year-on-year at US$287m and debt capital markets were up 4% over the same period to US$519m. Advisory fees fell 26% to US$228m but Thiam said the pipeline was encouraging.

A SFr2.3bn charge relating to US tax reforms meant the group made a SFr2.13bn net loss in the quarter.

The bank also said it is cooperating with the US Department of Justice and Securities and Exchange Commission “regarding hiring practices in the Asia-Pacific region”.

This relates in particular to “whether Credit Suisse hired referrals from government agencies and other state-owned entities in exchange for investment banking business and/or regulatory approvals”.

Such hiring of princelings, children of important officials or businessmen, might violate the US Foreign Corrupt Practices Act.

Credit Suisse shares were up 3.5% at SFr17.065 by 12:30pm in London. (Reporting by Christopher Spink)

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