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WIKI ANALYSIS
Credit Suisse Group (NYSE:CS) is one of the world's leading banking institutions and is the sixth largest wealth management firm in the world in terms of assets under management with $612 billion.[1] The Swiss firm advises corporations on mergers and acquisitions, facilitates client equity and fixed income trading, manages assets for institutional investors and engages in both long-term (private equity) and short-term investments (propriety trading).
Over the past two years, management has made significant structural changes to decrease costs and increase profitability, such as the consolidation of administrative expenses across divisions, the removal of divisional silos to encourage more intersegment cross-selling and the rebranding of Credit Suisse's private bank under the CS name. These efforts combined with a buoyant market led to record profitability in 2006. Despite the internal reorganization efforts, it saw its net income decrease almost 19% in 2007 as a result of the 2007 Credit Crunch. With the collapse of the U.S. subprime mortgage industry and subsequent tightening in global credit markets, financial firms like Credit Suisse have faced a challenging business environment; Credit Suisse posted net losses of over $2 billion in the first nine months of 2008.[2]
Business Model
The Credit Suisse Group serves clients around the world through three divisions: investment banking, private banking, and asset management. Credit Suisse promotes client cross-referrals across the company by having the three divisions operate under the Credit Suisse brand name. Their clients can include individuals, institutions, and corporations.
Investment Banking
Credit Suisse's investment bank operates in 57 locations and 26 countries and is employed by clients running the gamut from large corporations to governments to financial institutions. Credit Suisse offers a wide range of financial services, including debt and equity underwriting, mergers and acquisitions (M&A), sales and trading, divestitures, and investment research.
The investment bank saw a 19% fall in net income from 2006 to 2007, due to declines in demand for its advisory and underwriting services. Rough market conditions were mainly responsible for the decline in revenues in this division, since it was much harder to raise money for these sorts of transactions. As a result, Investment Banking contributed just 32% of Credit Suisse's 2007 net income even though it accounted for 49% of net revenues.
Private Banking
Credit Suisse's private banking operations are split into two subdivisions: wealth management and corporate & retail banking. Credit Suisse is the second-largest wealth management firm in the world and a leader in corporate & retail banking in Switzerland. In total, the Private Banking division accounted for 33% of net revenue and 37% of net income in 2007.
Wealth Management
With 160 offices worldwide, including approximately 80 located in Switzerland, Credit Suisse offers a range of wealth management services to fit the needs of high net worth individuals around the globe. The bank's products and services include pension planning, life insurance products, inheritance advice, and tax planning. Credit Suisse's comprehensive advisory system includes both asset and liability management.
Credit Suisse Group's wealth management subdivision also includes an integrated independent private bank, Clariden Leu, which serves high net worth clients in Switzerland and 17 other countries.
Corporate & Retail Banking
In Switzerland, Credit Suisse serves its corporate and retail banking clients with 215 banking branches throughout the country. An online network allows clients to access and manage their accounts securely from any location, at any time. Corporate advising services for small and medium-sized corporate clients are available at over 40 of Credit Suisse's branch offices, and advising for large corporate clients is centered in two regional offices.
Credit Suisse also offers consumer finance services through BANK-now, which supplies individual clients in Switzerland with private credit offerings and car leasing.
Asset Management
Credit Suisse's asset management division operates in more than 20 offices in 19 countries. Relationship managers are assigned to specific clients, and are responsible for proposing and implementing investment solutions. Clients range from institutional and individual investors to governments and corporations. Products and services in the asset management division include investments in fixed income (investments that offer a fixed, predetermined rate of return, such as bonds and money market instruments, including U.S. Treasury bills and U.S. government bonds), equities, and alternative investments. This division brought in 6% of Credit Suisse's 2007 revenues and accounted for 2% of total pre-tax income.
Credit Suisse has been reorganizing its asset management business to focus on alternative investments. These alternative investments include real estate, hedge funds, private equity, and volatility management. Credit Suisse engages in both in-house and joint asset management ventures with other firms.
Centers of Exellence
Credit Suisse has also taken a step to streamline its operation in the increasingly global market. It has opened four centers of excellency that support the business office in New York. The centers are located in the following cities: Raleigh, North Carolina; Pune, India; Wroclaw, Poland; Downtown Core, Singapore. The roles of the centers range from analytics, finance, product control, IT, and operations. The centers have experienced rapid growth in both number of employees as well as support functions offered. Credit Suisse hopes to leverage its talent worldwide to provide superior and immediate support to its business functions.
Trends and Forces
Global economic growth expands market for CS
Global gross domestic product (GDP) increased by an estimated 4.9% over the course of 2007.[4] As the world economy as a whole expands, consumers and firms have more wealth to spend and invest, which translates into increased demand for financial services like those offered by Credit Suisse. The strength of the world economy has promoted quicker recovery in Western Europe, which benefits Credit Suisse in the form of higher revenues from net capital inflows, as well as inter-generational wealth transfers, which will boost the revenue generated by the inheritance planning services of Credit Suisse's private banking division.
CS has since expanded by providing financial advisory services to countries with higher economic growth, such as:
- In Latin America, Credit Suisse has acquired a majority interest in Hedging-Griffo, one of the largest asset management and private banking firms in Brazil.
- In Moscow, Russia, CS initiated an onshore wealth management business to complement the existing investment banking business there.
- In the Middle East, CS expanded its onshore activities in Lebanon and Qatar to offer a full range of investment advisory services and products.
Emerging Markets offers growth and access to new clients
Credit Suisse's presence overseas is large and growing: Investment banking is well positioned to benefit from the increasing importance of these markets to the global economy, as well as their rapid growth and high profit potential. Capital investments tend to be subject to diminishing marginal returns, meaning that the more capital that has been invested in an economy, the smaller the benefit of additional capital investment will be. Since emerging markets typically have very small capital stocks, capital investment has the potential to be extremely lucrative.
- In India, CS is seeking banking licenses from the Indian Central Bank to be able to accept deposits and to offer financial services such as derivatives and advisory services.[5]
- In South Africa, Credit Suisse partnered with Standard Bank to expand its equities business. This partnership gives CS's clients access to the South African equities market, which is a component of many emerging market indices.
- In China, CS helped facilitate the IPO's of the Industrial and Commercial Bank of China Limited, China's leading commercial bank, and China Construction Bank. The latter was the world's largest IPO in 2005. In addition, Credit Suisse won regulatory approval to set up a joint venture with Founder Securities in China. Under the terms of the deal, Credit Suisse will be able to underwrite debt and equities offerings in China's domestic capital markets.[6]
Macroeconomic Factors
Housing Market
Investment banks, particularly those with significant mortgage securitization practices, are very sensitive to the residential real estate market. Mortgage-backed securitization (MBS) is the bundling of mortgages for sale to third parties. When the housing market goes down, the value of the underlying mortgages backing these securities falls as well. Moreover, the overall number of mortgages also decreases.
Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of real estate are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Morgan Stanley.
Benefit from low interest rates
Interest rates can be thought of as the cost of borrowing money, as interest rates increase, businesses are less likely to issue debt or equity given that the price of borrowing has increased, which dampens the overall demand for mortgages and other home loan products. The lowering of the U.S. Federal Funds Rate should, in theory, help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates. The Fed has been consistently lowering rates since 2007. For example, in July 2009 it was 0.5%, compared to 2% in July 2008 and 5.25% in September 2007.[7][8] Additionally, economic uncertainty in Europe and the U.K. has led the UK central bank to lower its rate from 5% in July 2008 to 0.5% in July 2009.[9]
CS stands to benefit from lower interest rates since they can afford to lend out more money. By lending more money, CS can collect interest on its loans.
Government Regulation
Obama's Bank Plan Restricts Banks' Profit Potential
United States President Barack Obama presented a plan on January 21, 2010 to restrict the activities of commercial banks, specifically outlawing proprietary trading and preventing commercial banks and institutions that own banks from owning, investing in or sponsoring private equity and hedge funds.[10] The Obama administration also plans to limit the ability of the largest banks to use borrowed money to fund expansion plans, which calls for an expansion of a 1994 law that forbids banks from acquiring another bank if the deal would give the bank more than 10% of the nation's insured deposits.[11]
Such legislation is intended to reduce speculative activity by financial institution in order to avoid future financial crises similar to the 2008 Financial Crisis; however, Obama's plan also has the effect of slowing economic recovery by limiting banks' ability to generate earnings as well as limiting investment in private equity deals and funds. U.S. banks make immense contributions to the buyout sector and have raised 60 funds since 2006, with a total value exceeding $80 billion. Such investments are crucial to driving economic growth and development, which will be greatly hindered with the imposition of such limits on the investment activities of major banks such as Credit Suisse. Since U.S. banks also manage more than $180 billion in hedge funds of funds subsidiaries, any restriction on banks' management of funds would affect hundred of hedge funds worldwide, which generate profits from such funds of funds.[10]
Competitors
Credit Suisse Group is one of the world's largest banking institutions. Its private bank is the most profitable in the world, which includes the world's second largest wealth management business. Credit Suisse also competes with investment banks for M&A advisory and debt and equity underwriting services. In the first nine months of 2007, Credit Suisse came in 7th worldwide in terms of the value of the completed mergers and acquisitions it advised.
Credit Suisse competes with other banks across private and investment banking and may compete with more than one division (i.e. JP Morgan and Bank of America compete across private and investment banking). Some of Credit Suisse's competitors include:
- Private Banking
- Investment Banking
References
- ↑ Bank of America Topples UBS as World Wealth Manager, CNBC July 6, 2009
- ↑ Q2008 Financial Report - Credit Suisse
- ↑ CS 2008 10-K
- ↑ IMF World Economic Outlook (WEO) Update, January 2008
- ↑ Reuters, The Goldman Sachs Group, Inc. And Credit Suisse Group AG Seek India Banking License-Reuters," 09/29/09
- ↑ Credit Suisse Joint Venture Cleared by Chinese Regulators - WSJ.com
- ↑ Bloomberg.com, US Rates and Funds
- ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
- ↑ Bloomberg.com, UK Rates and Bonds
- ↑ 10.0 10.1 Hedge Funds, Private Equity Seen Hit By Obama's Bank Plan
- ↑ 'Volcker Rule' Socks Bank Trading, Funding For Hedge funds And Private Equity
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