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.

Break out the Champagne?

The point of this blog is to first provide some basics on derivatives and then begin commenting on current events where these financial instruments loom large. But, seeing as third quarter earnings for the banking sector are trickling in, I can’t resist a brief detour. Below is the round up so far:

Some banks are making money
JP Morgan: $3.6 billion
Goldman Sachs: $3.2 billion

Others not so much
Bank of America (or is it Banc of America?): -$1.0 billion
Citigroup: -$3.2 billion

But I don’t care about these top line numbers since they reflect the sum total of a wide range of businesses, many of which I know nothing about. I am interested in trading results, and you may be too.

Revenue from non-equity (bonds, currencies, and commodities) and equity trading units
Goldman: $6.0 billion (non-equity) + $2.8 billion (equity) = $8.8 bn
JP Morgan: $5.0 billion (non-equity) + $0.9 billion (equity) = $5.9 bn
B of A: $4.4 billion (non-equity) + $1.4 billion (equity) = $5.8 bn
Citi: $3.9 billion (non-equity) + $0.4 billion (equity) = $4.3 bn

Not surprisingly, Goldman has turned in the strongest trading results however you cut it. Somewhat surprisingly (given the amount of negative attention the Merrill Lynch acquisition produced), Bank of America is right up there with JP Morgan, thanks to Ken Lewis’ corralling of the thundering herd. The Merrill purchase may have sent Lewis packing, but it has made Bank of America’s once laughable sales and trading franchise a force to be reckoned with, particularly on the equity side.

At this point, I don’t even think Vikram Pandit would disagree that Citigroup is now the clear sales and trading laggard among the full-service banking troika of Bank of America, Citigroup, and JP Morgan. Thankfully, I dumped Citigroup stock when it was at $50 – I don’t expect it to return to that level in my lifetime.

Yet, even Citigroup’s non-equity numbers aren’t half bad if you consider where we were just a year ago. Of course, Q3 2008 was an absolute shit show as the financial world all but collapsed in September 2008 (the end of Q3 for all financial institutions except the soon-to-be-extinct pure play investment banks Goldman Sachs and Morgan Stanley)

Q3 2008 revenue from non-equity and equity trading units
Goldman*: $1.6 billion (non-equity) + $1.6 billion (equity) = $3.2 bn
JP Morgan: $0.8 billion (non-equity) + $1.7 billion (equity) = $2.5 bn
B of A: -$0.4 billion (non-equity) + $0.2 billion (equity) = -$0.2 bn
Citi: -$2.4 billion (non-equity) + $0.5 billion (equity) = -$1.9 bn

*Goldman’s quarter ended August 29, 2008, not September 30, 2008, unlike that of the other three banks.

It’s interesting to note that at least by sales and trading revenue, the ranking of the four banks in Q3 2008 was the same as that in Q3 2009 and the gap between highest and lowest was quite similar (nearly $5 billion in each case).

Clearly, 2009 has been a much better year for banks in general, and in subsequent posts, I will go into some of the reasons for the turnaround. One thing that stands out, or rather no longer stands out, is the write down issue. Now that banks are no longer marking down billions worth of credit-related assets, they are actually printing some serious cash on the non-equity front. Given the significance of fixed income write downs in 2008, the non-equity side has been the clear driver of the performance difference between this year and last for every bank on the list. In fact, even during the heart of the credit crunch last year, some banks were then reporting stronger equity numbers than they are now.

I have a lot more to say on this matter and am curious to see what Morgan Stanley reports on Wednesday, October 21. My guess is that they will land somewhere between Bank of America and Citigroup in sales and trading revenue. Though Stanley has dialed down the risk and won’t come close to Goldman on the trading side any time soon, this should be their first positive earnings quarter of the year – cause for at least a modicum of celebration at 1585 Broadway.

Of course, Mack and his cronies won’t be able to do all that much in the way of celebrations. With the government still claiming to be scrutinizing the pay practices of banks, no institution will be popping the champagne corks – at least in public. But, Q3 2009 results, coming after strong Q2 numbers, will no doubt be cause for more muted revelry on Wall Street.