Credit Suisse’s FICC Trading Misses in 2010 But Should Recover in 2011

by Trefis Team
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Trefis
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Credit Suisse
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Credit Suisse’s (NYSE:CS) trading division accounts for about 40% of the $47.46 Trefis price estimate for Credit Suisse’s stock, which is slightly ahead of the current market price. Credit Suisse competes with Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM), UBS (NYSE:CS), and Goldman Sachs (NYSE: GS) in trading, investment banking and asset management services.

Results Show Mixed Picture

Credit Suisse released 4Q 2010 and full year results recently. Its net revenues for the quarter increased by 8% as compared to the same period last year. However, its net revenues for the year decreased by 6%. For its private banking division, which includes our Swiss clients, international clients and corporate & institutional clients divisions, revenues for the quarter decreased 3% with full year revenues remaining flat. For its investment banking division, which includes our advisory, equity & debt underwriting; bonds, currencies & commodities trading (also called FICC) and equities trading, revenues for the quarter increased by 14% but full year revenues were down 21%. However, the asset management division did particularly well with revenues for the quarter down just 3% and full year revenues up by 27%. [1]

In the investment banking division, total underwriting and advisory fees increased by 28% for the year, but its FICC and equities trading revenues were down by 38% and 21% respectively. These two businesses comprised just over 50% of total revenues in 2009 and its dismal performance in 2010 offset the better performance from other divisions.

Fixed Income a Concern

The fixed income trading business was hit by a weak global macro economic environment and the sovereign debt crisis in Europe. However, with gold, cotton and copper reaching record highs, the commodities markets provided banks with the opportunity to offset their losses in fixed income products. However, the revenues from commodities trading generated by Wall Street’s top banks fell on an average by around 40%. [2]

This is due to the fact that larger and more liquid energy markets remained lackluster and recorded low volumes and volatility in 2010. On the other hand, metals and agricultural products recorded high volatility and price swings, thereby attracting more traders and increasing volumes and liquidity. In particular, Credit Suisse’s revenues from commodities trading fell by around 42%. [2]

Outlook for 2011

Going into 2011, the macro economic environment is expected to improve and a markets have a clearer view on the impact of several of the regulatory uncertainties that served as an overhang last year. We expect these factors and a more normal interest rate environment to provide support to fixed income trading.

On the commodities front, banks’ dismal performances last year are unlikely to deter them from aggressively expanding in these markets. Commodities prices are expected to further increase this year on growing demand from emerging countries and the possibility of depreciation of the U.S. Dollar. As a result, with prices expected to remain volatile, banks are expected to get more business from both producers and consumers, who will look to increasing their hedging activities. [2]

The yield on FICC trading assets for Credit Suisse 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 1 percentage point by the end of our forecast period, it would mean an upside of around 5% to our current price estimate for Credit Suisse’s stock.

Notes:
  1. Credit Suisse Reports 4Q and Full Year Results []
  2. Commodities boomed, but not for Wall Street [] [] []
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