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Credit Suisse exiting dealer role rings alarm in debt market

Friday, October 23, 2015 - 16:47
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Credit Suisse Group AG shook Europe's bond markets by deciding to drop its role as a primary dealer across the continent, the latest signal that some the world's biggest banks are scaling back in one of their key businesses.

[ZURICH] Credit Suisse Group AG shook Europe's bond markets by deciding to drop its role as a primary dealer across the continent, the latest signal that some the world's biggest banks are scaling back in one of their key businesses.

The move is part of chief executive officer Tidjane Thiam's overhaul of the lender's trading and advisory services to help cut costs in a strategy update announced on Oct 21. The Zurich- based lender will withdraw from the UK primary-dealer market on Friday, the nation's Debt Management Office said. It's the first time a gilt primary dealer - which buys sovereign debt directly from the government - walked away since December 2011, when State Street Corp's European division withdrew.

"This is a dramatic move for Credit Suisse, and a step back for bond-market liquidity," said Christopher Wheeler, an analyst at Atlantic Equities LLP in London. "This is probably designed to reduce costs and capital tied to its investment bank business. I hope it's not a shape of things to come for the bond market."

The world's biggest banks are shrinking their bond-trading activities to comply with regulations such as higher capital requirements imposed following the financial crisis. These restrictions have curbed their ability to build inventory or warehouse risk. The result is that prices can be more volatile for money managers and private investors.

Credit Suisse shares rose 1.1 per cent to 23.91 francs at 10:28 am in Zurich. They have decreased about 4.7 per cent this year.

The situation has worsened in the past five years. The size of US Treasury market, for example, has expanded by more than 45 per cent in five years to US$12.9 trillion, according to data compiled by Bloomberg. At the same time, the five largest primary dealers - those financial institutions that trade with the Treasury - have cut their balance sheets by about 50 per cent from 2010, according to data from Tabb Group LLC.

Credit Suisse will remain a primary dealer for the US Treasuries market, according to Adam Bradbery, a London-based spokesman. While the bank may still trade gilts, it's no longer committed to making markets for them, he said.

"The sum of regulations is strangulating the investment- banking industry," said Soeren Moerch, head of fixed-income trading at Danske Bank AS in Copenhagen. "I expect more to follow Credit Suisse if this continues." Asia Focus Thiam, who took over from Brady Dougan in July, will shrink the macro unit, which contains rates and foreign-exchange trading, as part of a wider restructuring of the group to focus more on wealth management in Asia and emerging markets. Macro will be about a quarter of its current size, the bank said Wednesday, when reporting a quarterly loss at the investment bank.

The bank's trading businesses outside Asia and Switzerland were combined in a global markets division, led by Tim O'Hara, under Credit Suisse's new structure. To increase synergies with wealth management, the strategic focus of macro will be on foreign exchange, rather than rates, the bank said.

Credit Suisse was among the smaller of the global investment banks that act as primary dealers across the European Union. The Swiss lender operated in seven EU countries, including Germany, France, Italy and Spain, while Barclays Plc is in 17, according to data from the Association for Financial Markets in Europe. Citigroup Inc, JPMorgan Chase & Co, Deutsche Bank AG, Goldman Sachs Group Inc, HSBC Holdings Plc and Societe Generale SA operate in at least 14, according to the association.

The move by Credit Suisse left the number of UK gilt primary dealers at 20, compared with 16 about a decade ago.

"You're seeing pressure at every single bank," said Harvinder Sian, a fixed-income analyst at Citigroup in London. "If you're not something of a monster in terms of presence and market share, then the economics just don't stack up." Stricter capital requirements and a slump in income from trading caused by record-low interest rates around the globe have forced Credit Suisse to rethink its strategy. On its investor day, which was preceded by a 24 per cent drop in net income, the bank also announced it would raise 6.05 billion francs (S$8.6 billion) in fresh capital, in part to comply with tougher requirements for the biggest Swiss banks. UBS Group AG, the other bank hit by the new requirements, called the so-called Swiss leverage ratio the "most demanding in the world on a relative basis."

Mr Thiam's overhaul also saw four members exit the executive board, with six new ones appointed, as the CEO created new divisions that are more focused on regions, rather than functions. Some 5,600 jobs will be eliminated across the US, the UK and Switzerland.

"We are always aware that a major reassessment of strategy by an individual bank is a possibility," said Robert Stheeman, chief executive of the UK Debt Management Office in London. "One institution's withdrawal could also signal another's increased opportunity. What is critical from our perspective is that we still have a large community of banks making markets and the gilt market continues to perform well."

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