Credit Suisse Made a Franc or Two (CHF 2.4 billion to be exact) with Surprising Efficiency

The Swiss can churn out chocolate, craft precise watches, and apparently, once in awhile, make a few billion CHF in banking. Of course, UBS is likely to report another loss this quarter, but its Zurich counterpart, CS, turned in respectable Q3 results. On the trading side, CS continued to deliver in equities (with almost $1.9 billion in revenue) and put in a decent showing in fixed income (with about $2.5 billion in ducats). Surely, neither of these results comes close to Goldman’s, but CS shouldn’t be written off as a second-bit player.

Actually, I found their results pretty impressive given how little risk they claim to be taking, at least as illustrated by the notorious value-at-risk measure. Now, I don’t want to use this post to go into the problems with VaR, so I’ll just say that for a given degree of confidence, VaR is a proxy for the maximum amount a firm can reasonably expect to lose in a given day. Once again, ignoring the pitfalls of the measure (and there are indeed many), you can basically think of VaR as an all encompassing measure of exposure – the higher the VaR, the higher the risk.

CS, to its credit (pardon the pun), actually broke its VaR down by product in its Q3 report. Though other institutions do this internally, they seldom do it for the public, and certainly not as clearly as our friends in Zurich have. Based on the third quarter numbers reported so far, I come up with the following VaR ranking across the Street:

Trading VaR in Q3 (across products)
Goldman Sachs: $208 million
JP Morgan: $206 million
Morgan Stanley: $118 million
Credit Suisse: $95 million

From this somewhat naïve ranking, it’s pretty clear that Goldman and JP take far more risk than their competitors. Indeed, both banks actually cut their VaR this quarter and MS increased it, yet the latter is still taking only about 50% of the risk of its more profitable competitors.

But taking a lot of risk isn’t necessarily a good idea, and even if added exposure can lead to added profits, it, by definition, also increases the possibility of problems. After all, risk is risky – excuse the tautology. So, I like a somewhat different measure, which I’ll call “Efficiency,” calculated as dollars of trading revenue per unit of VaR. On this assessment, CS comes out a lot better.

Efficiency in Q3 ($/unit VaR)
Credit Suisse: 46
Goldman Sachs: 42
JP Morgan: 29
Morgan Stanley: 27

If anybody from Credit Suisse is reading this blog, take heart – this may be the only list in recorded history where your firm ranks higher than Goldman. I guess the Swiss really are efficient.