Breakingviews – Credit Suisse bonus cuts are a necessary gamble

LONDON (Reuters Breakingviews) – Investment bank bonuses rarely act as the first line of defence. Many lenders continued to make generous payouts in 2009, even though taxpayers had just bailed them out. Credit Suisse Chief Executive Thomas Gottstein may take a different tack out of necessity. It could serve as an overdue test of the market for bank talent.

The Swiss bank set aside less than usual for bonuses in the first quarter, the Financial Times reported on Monday. That helped add about $600 million to its pre-tax profit, buffering the near-$5 billion hit from the collapse of hedge fund Archegos. Roaring markets and a boom in special purpose acquisition companies also contributed. As a result, Credit Suisse’s first-quarter loss will be less than $1 billion.

Gottstein had little choice. Even with the bonus savings, Credit Suisse’s common equity Tier 1 capital ratio will probably dip below 12.5%. With a further possible hit pending from funds linked to bankrupt supply chain financier Greensill, which have $2.3 billion of exposure to three particularly dicey clients, the bank was in danger of needing to raise capital. Gottstein could also still reverse course. Banks accrue payments for future bonuses each quarter but don’t pay them out until the end of the year. Credit Suisse could in theory make up for lost time if it performs well.

Still, pay restraint would serve as a useful experiment. The old argument is that banks need to keep paying star traders and rainmakers, even during a crisis, to ensure they have a competitive franchise. Credit Suisse’s SPAC bankers, who topped the global league tables for blank-cheque companies in 2020 according to Refinitiv, could jump ship to a rival. A probable risk clampdown at Credit Suisse, and higher capital charges, may prompt traders to head for the exit.

Yet the market for investment banking is hardly roaring. Last year compensation and benefits fell as proportion of revenue at the wholesale units of JPMorgan, Morgan Stanley, Credit Suisse and Deutsche Bank. Banks have slashed frontline trading staff by 13% since 2015, Coalition data shows.

And Credit Suisse’s investment bankers have hardly covered themselves in glory: the division’s average return on regulatory capital over the last five years is less than 9%. Gottstein may yet decide that a shrinking wholesale division is well worth the risk.