Credit Suisse Prime Brokerage Business Slated For Cuts

Prime services is one of several businesses that Credit Suisse is considering for downsizing.

The cuts would form part of the CHF70 billion worth of cuts the bank plans to in order for leverage ratio reduction reasons. About CHF20 billion of those cuts will impact the global macro business with the rest being businesses in other parts of the bank, including prime brokerage.

Plans to shrink the business were first reported in the Financial Times. Increased capital requirements, lower margins and growing concerns about a lack of profitability has prompted many banks to scale back their prime brokerage operations.

Credit Suisse has joined other providers who have recently re-priced their services in an industry wide move in order to offset low returns. Despite high levels of profitability of Credit Suisse’s prime brokerage business, the high use of balance sheet by that business has depressed return on capital (which Credit Suisse calculates as pre-tax income divided by risk weighted assets and leverage exposure). Profitability is thus affected by the amount of balance sheet usage, which depresses the return of the prime business.

Other banks have retreated from the prime brokerage space given the amount balance sheet it consumes or have reduced their lend to the clients of a certain scale.

Most recently, J.P. Morgan announced it would exit the third party broker-dealer clearing and custody unit after a strategic review deemed it to be not a ‘core business’. In addition, HSBC said it will restructure its prime services management after the exit of Chris Barrow, the bank’s former global head of prime services sales.