French and Swiss Bankers' Summer May Be Brief

(Bloomberg Opinion) -- Wall Street's worst first half in more than a decade for trading is turning out to be surprisingly less painful for some European firms: Credit Suisse Group AG and BNP Paribas SA managed to claw back some of the market share they had previously lost. But counting on a continued rebound could be a mistake.

On Wednesday, Switzerland's second-biggest bank reported a 7% increase in second-quarter fixed income revenue, against a decline of the same magnitude among its U.S. peers. Income from trading stocks was flat across the firm, but compared favorably with the 8% drop posted by its rivals across the Atlantic.

This isn't quite a vindication of Chief Executive Officer Tidjane Thiam's three-year effort to pivot the bank away from the volatile trading business to the more stable world of managing wealthy clients' money. It is still far from certain how sustainable the uptick in trading will be.

In equities, a business that analysts estimate was unprofitable as recently as last year, Thiam said he is confident Credit Suisse has been catching up with the top five players as it attracts balances from big hedge funds. This matters because only the biggest are likely to generate a profit from that business.

But in May, the firm replaced the head of the unit, Mike Stewart, who had been charged with turning around the operation when he was hired in 2017. The impact of the recent management changes remains to be seen.

The outlook also remains “very difficult” in Asia, Thiam acknowledged. There, fixed income revenue slumped 29% in the three months through June. What's more, an over-reliance on bonds across the firm may not help if the fixed-income market turns after an exceptional first half.

Then there is the mysterious contribution of the International Trading Solutions unit, or ITS. A joint venture between Credit Suisse's wealth management, markets and Swiss units, the bank hailed ITS as a big driver of income in the first quarter – even if it didn't provide specific figures.

Asked how the business helped markets in the second quarter, Thiam said it was “one of the components in equities.” The only references to ITS in the financial report point to a decline in both quarter-on-quarter and year-on-year revenue. As I've said before, more transparency on the lumpy trades it generates is essential.

Credit Suisse's rival BNP also defied expectations with an 8% bounce in bond and currency trading revenue. The figure for equities was down 14% on an exceptionally strong year-earlier period.

With the outlook for revenue deteriorating last year, the French firm accelerated a plan to reorganize its investment bank and focus on high-volume electronic business and select bespoke deals with fatter margins. The gains this year amid lower volatility in foreign exchange suggest the shift is paying off, but there may not be much upside left.

Neither Credit Suisse nor BNP would comment directly on the competition, but both are probably benefiting from the retreat of European rivals. Deutsche Bank AG is giving up on equities trading and Societe Generale SA is scaling back in rates, currencies and prime services. BNP is, for example, preparing to ramp up its services for hedge funds by taking on Deutsche Bank's clients and platforms.

Whether both firms are able to rebuild and keep growing their franchises beyond these recent readjustments is still far from certain.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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