What's going on?
While major banks on both sides of the Atlantic have reported better than expected results this earnings season, Credit Suisse is struggling to keep up. After reporting its results on Thursday, its stock sold off 7%. Ouch.
What does this mean?
The Switzerland-based bank has been downsizing the part of its business that’s responsible for making money by trading stocks, bonds and currencies. This decision was partly driven by the unexpected loss of $1 billion by the division earlier this year. Other banks, from Morgan Stanley to Barclays and even Deutsche Bank, have made more money this quarter than expected largely due to their trading divisions. But Credit Suisse, after sharply pulling back from trading, wasn’t able to join the party.
Why should I care?
For the stock: Credit Suisse plans to rely much more heavily on managing investments for clients – which is a tough industry right now.
Credit Suisse wants to increase the amount of money in the funds that it manages itself. It also wants to increase the number of rich individuals it serves out of its private bank. These strategies are viewed as safer and steadier than the riskier world of investment banking. However, there is a huge amount of pressure on investment managers to charge their clients lower fees – in other words, it’s focusing on a space which, although less risky traditionally, is going through its own turmoil.
The bigger picture: Downsizing is not a viable long-term strategy.
Thursday’s results are a reminder that cutting costs and paring back businesses offer only a one-time boost to profit and usually come at the expense of revenue generation in the future. With much less emphasis on its trading division, Credit Suisse’s investment management businesses are going to have to do better in order for the bank to improve its profitability.