Credit Suisse Adding Talent to High Grade Debt and ABS to Boost FICC Trading

March 8th, 2011 by Trefis Team
2.50
Trefis
CS: Credit Suisse logo
CS
Credit Suisse

Credit Suisse’s (NYSE:CS) trading division accounts for about 34% of the $49.17 Trefis price estimate for Credit Suisse’s stock, which is slightly ahead of the current market price. It competes with UBS (NYSE:UBS), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS). The company looks to expand into is looking to revamp its trading profits by reorganizing parts of its FICC team.

Credit Suisse hired Eric Miller the former head of credit research at Barclays Capital, to run its fixed income research globally for a start. Though Credit Suisse led Barclays in high-yield debt underwriting, Barclays Capital was two places ahead of Credit Suisse in U.S. corporate debt underwriting, positioned at sixth place, according to 2010 data compiled by Bloomberg. [1]

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We earlier discussed the performance and outlook for Credit Suisse’s trading division in a note titled Credit Suisse’s FICC Trading Misses in 2010 But Should Recover in 2011. Though FICC trading weighed down on results in 2010, going forward, we expect this business to pick up.

In addition to this, Credit Suisse has hired Jay Kim along with around 10 of his team members to lead its asset backed securities team. This move is aimed at increasing Credit Suisse’s market share in asset backed deals, which stands at around 5.2% in 2010. [2] Hiring from Barclays makes sense as in 2010 it had more than 3x the market share of Credit Suisse. Between 2009 and 2010, Barclays Capital’s market share in asset backed deals increased by over 3% while that for Credit Suisse increased by less than 1%. [2] Credit Suisse is also looking to acquire another hedge fund business, in order to profit from the growing institutional demand for these investments. [3]

We estimate the income from FICC by looking at the yield on FICC trading assets, and Credit Suisse’s decreased from 3.24% in 2005 to -2.4% in 2008, with the bank incurring heavy losses on its trading portfolio during the economic downturn when returns across most major asset classes were sharply declining.

However, with the global economic environment slightly improving in 2009, the yield on trading assets for FICC increased to 4.3%. We estimate that these assets took a step back again in 2010 though this should recover in 2011 and rise to nearly 5.2% by the end of the Trefis forecast period. If this trends continues and the yield on FICC assets increases by another 2 percentage point by the end of our forecast period, it would mean an upside of around 10% to our current price estimate for Credit Suisse’s stock.

See our estimates for Credit Suisse.

Notes:
  1. Credit Suisse Hires Miller to Run Global Fixed Income Research [↩]
  2. Credit Suisse Hires Barclays Banker, Shakes Up ABS [↩] [↩]
  3. Credit Suisse eyes another hedge fund business [↩]