(Bloomberg Opinion) -- Cost cuts only go so far, and questions remain over where the growth in the bank’s wealth management business is coming from.
Credit Suisse Group AG made a point of noting it navigated the severe market dislocation at the end of 2018 with no material losses. That is a break from the past, the happy result of the Swiss bank’s shift away from risky trading to managing money for the wealthy.
Is it time to celebrate a restructuring that will now deliver sustainable profit growth? Well, not so fast.
In market conditions that Chief Executive Officer Tidjane Thiam described as the perfect stress test, the bank’s fourth-quarter pretax profit beat estimates, bringing the full-year total to 3.4 billion Swiss francs ($3.4 billion), the largest annual profit since 2014.
Driving that outperformance was a tougher stance on costs. Thiam deserves credit for cutting annual expenses from 21 billion francs in 2015 to a better-than-expected 16.5 billion francs in 2018. In a year in which markets revenue fell well short of his target, being frugal certainly helped.
What’s less clear is how much the bank can rely on deeper cost-reductions in future should the markets businesses continue to disappoint. And for all Thiam’s comments that he is happy to trade volatile markets revenue for more “high-quality” income in wealth management, investors should also question what’s behind the supercharged growth in the latter business.
Pressed by analysts on the outlook for costs this year, Chief Financial Officer David Mathers said the firm can continue to achieve savings of 2 to 3 percent, while additional investments will depend on markets. Big cut-backs in markets aren’t on the agenda right now, but investors may keep pushing for them.
Across the group, revenue was flat in 2018, and needs to remain unchanged if the bank is to meet its target of making a 10 percent return on tangible equity (compared with just under 6 percent in 2018.) The bank is also counting on running off assets it has been exiting and lower funding costs to get to the higher return.
Revenue looks like it will be a challenge. At 5.1 billion francs in 2018, trading income missed the bank’s target by 15 percent. What’s more, the bank lost 193 million francs in global markets in the fourth quarter as volatility and widening credit spreads hurt its fixed-income business. The restructured unit still soaks up about a fifth of the group’s risk-weighted assets, but that revamp is yet to pay off.
Thiam sees some upside in structured products, which will feed off its wealth management business, and in growing the bank’s equity derivatives business. That may work, but with the outlook for 2019 muted, success isn’t a given.
Credit Suisse has shown it can keep expanding its wealth business amid market adversity. It was able to add 500 million francs in net new assets while bigger rival UBS Group AG posted outflows. Even as Asian stock markets posted the worst performance since 2008, the financing group in the region had its best fourth quarter ever.
Providing financing to Asian billionaires secured against illiquid assets like buildings, roads or plantations may be a winning formula to bring in business. We just don’t know yet if the push was wise. Thiam’s protests that he isn’t chasing revenue for the sake of revenue could yet come back to haunt him.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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