Credit Suisse considers itself one of the ten most important investment banks, something which is no use to it. A study by J.P. Morgan offers pointers on what new Chairman Antonio Horta-Osorio could do.

Credit Suisse Chairman Antonio Horta-Osorio ruffled the feathers of his investment bankers in London this week when he said the wealth management business «with its ancillary services» was great.

Rather than a gaffe this might have been a calculated statement.

Investment Bank «Drag» on Credit Suisse

A study by J.P. Morgan entitled «The Future of Investment Banking» says Credit Suisse’s most pressing problem is the investment bank, which at the moment is more than an adjunct to wealth management.

The analysts say in the study that in their view the investment bank «is a drag» on Credit Suisse because it is still to heavily oriented toward trading in credit and interest-rate instruments.

Bottom of Heap

The investment bank’s credit business is the most leveraged of all the investment banks studied in the report. As well as Credit Suisse these are Goldman Sachs and Morgan Stanley, Barclays, Deutsche Bank, BNP Paribas, Société Générale and UBS. Trading credit products was a source of uncertainty, particularly when markets were volatile, the analysts said.

The study ends with a ranking of these eight investment banks in which Credit Suisse comes last.

Basel IV, RWA

In its first-quarter results, Credit Suisse said its investment bank had increased its risk-weighted activities considerably which results in higher capital and reserve requirements. The J.P. Morgan analysts show that under the new Basel IV capital requirements Credit Suisse’s RWA would rise 26 percent, more than all the other investment banks.

That would reduce the return on capital, which was in any case not exactly stellar at 7.9 percent. This meant Horta-Osorio would have to start with the fixed income department of the investment bank which is dominated by credit trading, the study said.
Potential Credit Suisse Doesn’t Have

The J.P. Morgan study is a reality check for Credit Suisse where trading is part of its DNA. Neither it nor UBS still counts as tier-1 investment banks. One reason for this is big gaps in transaction banking, significant cash and treasury as well as custody and execution services.

Many analysts, not only those from J.P. Morgan, say much of the future potential for global investment banking lies in this area because it involves long-term relationships with clients who might take up other services in the area of corporate finance.

Lowest IT-Budget

Transaction Banking is a highly technological business. The analysts said Credit Suisse simply cannot keep up with a budget of around $3 billion. They said the same of UBS with its $3.5-billion budget.

Goldman Sachs has pumped enormous sums into building a transaction banking platform for which it wins the analysts’ praise. This is because they say that transaction services will be at the heart of investment banking’s future ecosystem because it offers numerous opportunities for cross-selling.

Global Trading Solutions

However, the analysts did not find fault with everything at Credit Suisse’s investment bank. They liked the global trading solutions unit which functioned well as an interface between the investment bank and global wealth management. Its turnover was also rising steeply due to improved cooperation within the individual divisions, the study said, food for thought for Horta-Osorio.