Credit Suisse to cut 11% of its workforce

Investment banking is hit hardest by the layoffs, with 3,800 jobs set to disappear. The move comes after the bank estimates a net loss of $2.5 billion in the past two months.
Credit Suisse yesterday became the latest bank to announce sizeable job cuts after estimating that it made a net loss of about Sfr3 billion ($2.48 billion) in October and November due to the adverse market conditions and costs associated with a risk reduction programme.

The Swiss bank said it plans to reduce its global headcount by 5,300 people, or 11%. Of the total, 3,800 jobs will be cut within investment banking, where staff numbers will drop from 21,300 at the end of the third quarter to 17,500 at the end of 2009. The cuts will be fairly proportional in terms of geographies and will affect all seniority levels. The investment banking division will also be refocused towards less risky and less volatile areas such as client and flow trading businesses, while the involvement in more complex products like exotic derivatives, collateralised debt obligations, hybrids and highly structured products will be scaled back. Certain proprietary trading and principal trading activities will be exited altogether.

At the same time, the bank will make investments to grow private banking both in its home market in Switzerland and globally. However, Credit Suisse stressed that it is still committed to an integrated business model that includes private banking and asset management, as well as investment banking.

ôTo say that we are de-emphasising investment banking is perhaps stretching it, because we still feel very, very strongly that we want an integrated business model and that the investment banking capability of Credit Suisse is incredibly important to our private banking and asset management client base,ö says Kai Nargolwala, Credit SuisseÆs CEO for Asia-Pacific. ôBut we think the market opportunities in certain product areas within investment banking have either diminished or become so volatile that investors, shareholders and clients are not going to be willing to tolerate it. Therefore, we are de-emphasising those, while keeping in place businesses like our algorithmic trading, rates and FX, prime services, cash equities and advisory, which use less capital and are a lot less volatile.ö

This shift away from high-risk businesses is no different from what most other global investment banks and universal banks are doing at the moment, and Credit Suisse noted that the reduced focus on complex credit and structured products is a direct reflection of a shift in client demand. While sizeable, the job cuts are also in line with what some of its competitors have been doing recently. Goldman Sachs in October said it would cut its staffing levels by 10% globally and in late November Citi said it will reduce its total headcount by 15% to around 300,000. However, about half of that will be achieved through the sale of businesses, resulting in actual layoffs of about 26,000 people.

Also yesterday, Nomura Holdings, which is in the process of integrating the businesses it bought from Lehman Brothers following its bankruptcy, said it would fire about 1,000 people in London. And over the past few days, Deutsche Bank has been letting go of people as part of a global cut of about 900 jobs in its global markets business that was reported a couple of weeks ago. While the cuts at DB are relatively modest, they do show that no bank is immune to the slowdown in business activity and the need for cost cuts û whether it had exposure to subprime linked derivatives or not.

According to Bloomberg data, banks and insurance companies have shed about 200,000 jobs globally since the global financial crisis began and have reported more than $970 billion in losses.

However, looking at investment banking specifically where staff numbers will shrink by 18%, Credit SuisseÆs cutbacks are quite stunning. The bank will also reduce its risk-weighted assets by 12% in the fourth quarter to $170 billion and by a further 20% in 2009 to $135 billion. In the first nine months of this year, the risk-weighted assets were trimmed from $236 billion to $193 billion.

Another eye-catching number revealed yesterday was a 34% reduction in underlying one-day value-at-risk in the investment banking business since the beginning of October û a very rapid and substantial decline, which suggests that the reduction of risk trading positions has been going on for a while already.

Credit Suisse says the job cuts together with other cost efficiency measures are expected to reduce annual costs by Sfr2 billion, or 9% of its annualised 2008 cost base based on the reported costs in the first nine months this year.

ôThese actions will better position us to weather the continuing challenging market conditions, capture opportunities that arise amid the continuing disruption, and prosper when markets improve,ö said Brady Dougan, Credit SuisseÆs CEO.

The reaction in the stockmarket was positive, with Credit SuisseÆs Zurich-listed shares gaining 10% yesterday. Its US-listed stock was up 6% with two hours left of the session in an otherwise weak market. However, the company has still lost 55% of its market value so far this year, based on yesterdayÆs closing price in Zurich.

According to a press release, the new operating model will reduce the earnings volatility, improve capital efficiency and better leverage the strengths of the integrated bank. The investment bank is estimated to have suffered a ôsignificantö pre-tax loss in October-November, although Credit Suisse as a whole made a modest profit in November partly thanks to solid asset inflows to the private banking arm in the fourth quarter so far. The deposit base and funding also remain solid, it said.

The fact that yesterdayÆs announcement comes so close after the bank completed a $9.1 billion capital raising exercise in mid-October indicates that the market environment and outlook has deteriorated more rapidly than what the management expected two months ago. The increasing requests for capital from governments in the US and Europe and the growing realisation that it will take a lot more capital to solve the current situation and avoid a deep recession than what people might have previously anticipated, point to the same thing û as does the round of very large rate cuts in the past week in countries like New Zealand, Australia, Thailand and Sweden.

To some extent the shift in focus comes at an unfortunate time for Credit SuisseÆs investment banking division in Asia, which has been increasing its market share both within M&A and equity capital markets this year as some investors and corporates have preferred to deal with a bank that has been less affected by the global turmoil and that still has the ability to put its balance sheet to work for clients. If that side of the business were to be given less room to take on risk as a result of the new strategy, the bank may well lose this advantage again.

However, Nargolwala notes that Credit Suisse has never been a large balance sheet provider and argues that the fact that the bank is currently at the top of the M&A league tables has more to do with its global execution and capital raising capabilities than it using its balance sheet to win business.

ôHaving said that, we definitely do use our balance sheet judiciously and that wonÆt change. One of the reasons why we are trying to reduce the capital usage in some of the more proprietary businesses and the principal financing activities, is so that, within the context of a smaller balance sheet for the investment bank, we still have the ability to support our financial institution and corporate clients,ö Nargolwala says.

As a gesture of goodwill, Credit SuisseÆs top three people û chairman Walter Kielholz, CEO Brady Dougan and investment banking head Paul Calello û have all decided not to take their bonuses this year. According to the release, the trio have informed the board that, in light of the bankÆs performance this year, it would not be appropriate for them to accept any additional compensation above their basic salaries.
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