The global pandemic is unleashing a trading boom for investment banks, but dashing hopes for other capital market activities. What are the hot spots for Credit Suisse and UBS?
For now, business is buzzing: Credit Suisse flagged a trading surge in its investment bank as the outbreak spread; UBS said it has experienced unusually high volumes as well. The current boom flagged by both banks is, of course, a reflection of the coronavirus roiling financial markets.
The first quarter is traditionally the strongest one for banks in trading anyway. Credit Suisse’s high-yield bond trading is a prominent example. Led in Europe by French wunderkind Hamza Lemssouguer, the desk traded $21 billion so far this year, which is more than some banks do all year, according to «Bloomberg.»
Junk Bond Bonanza
The unit reportedly made the Swiss bank roughly $120 million trading junk bonds in Europe last year. The outlook for Lemssougeur the rest of the year is murkier: the virus’ spread has sent investors scurrying out of the market for less-than-investment grade bonds, in fear of corporate default.
While trading houses may benefit in the short term, how hard will the big Swiss banks be hit in their capital markets activities further out? The wider outlook for capital markets business like corporate lending and issuing stock is dour.
Asian Dealmaking
The carousel of mergers-and-acquisitions, in full tilt towards the end of last year, has screeched to a halt amid the coronavirus. The collapse in M&A is likely to hit UBS first – and hardest. The Swiss wealth manager was top revenue earner in Asian deal-making last year, according to Dealogic data. Credit Suisse isn’t far behind, in fourth place – powered by a strong position in China.
Overall, Credit Suisse is in eighth place globally in M&A revenue won. UBS, which has a more fragmented presence as an adviser, didn’t make the top-ten despite strength in Latin America, Europe, and Asia (the Swiss giant advised private equity buyers on the $12 billion purchase of Thyssenkrupp’s elevator business last year, for example – the largest-ever deal in Germany).
Fixed Income Strength
Elsewhere, Credit Suisse opted to keep a bigger presence of the two banks in fixed income, which leaves it more vulnerable – not least because it is coming off a 60 million Swiss franc ($63 million) pretax loss at its investment banking and capital markets arm in the last quarter of 2019.
Now led by investment banker Thomas Gottstein, Credit Suisse ranks third in revenue off syndicated loans globally, sixth in securitization, and is second only to J.P. Morgan in lending for leveraged buyouts in the U.S. Specifically, the leveraged loans may cause the Swiss bank a headache.
Shifting Leveraged Loans
Together with Goldman Sachs, Credit Suisse underwrote $500 million in loans for a private equity house to buy out Golden Goose, an Italian luxury sneaker maker. It hasn’t been able to shift nearly $1.8 billion in loans to Dutch equipment rental firm Boels, according to the «Financial Times».
Both banks lined up to pitch in on $12 billion in loans and credit for the Thyssenkrupp deal. Given the market turmoil, banks are in no hurry to assemble the financing, reportedly pushed back from the second quarter.
Both big Swiss banks are vulnerable in equity capital markets revenue: Credit Suisse finished in sixth place in revenue last year, and UBS in eighth. All told, the pandemic may extend the lead that dominant U.S. players like J.P. Morgan established over Europe’s banks after 2008/09.
