Investment banking made simple enough to bore people Credit Suisse has totally bored Matt Levine at Dealbreaker with their latest earnings announcement. There are only so many ways to outperform in banking. But these days balance sheets are constrained, regulations are biting, and financial "innovation" raises eyebrows. It's just dull, in some respects. Here's Matt, bemoaning the utterings of Credit Suisse CEO Brady Dougan: I had so much hope! I mean, "reduce costs" is boring and sad, and "momentum on the client side" is just like "be good bankers" which whatever, but "optimize our capital" could mean all sorts of devious things. It probably does but I couldn't find them. I mean, other than the usual devious things,... Frankly, when it comes to investment banking, it can broken down to a few key components - as SocGen pointed out in a note last week (emphasis ours): When we look at the investment banking industry, we believe that despite the deep complexities underneath, in the end, banks have three levers to manage their performance in investment banking: the yield per unit of asset that banks can generate, the cost income ratio, and leverage. Basel III creates a bewildering set of (largely misdirected in our view) incentives to adjust the business model, but in the end, there is little bank management can do other than trying to move one or all of these levers. As for the current state of play (click to expand): And how banks might attempt to reach their return on equity targets, or at least tread water: As we highlighted in our launch report of 11 June, the European investment banks are still stuck in their traditional business model of lending out their balance sheet at cheap prices, and given the still-modest progress on cost, they depend on leverage to maintain some semblance of RoE performance. There are no doubt some regulators who aren't so keen on the banks" dependence on leverage to hit desired targets, but at least the analysts at SocGen think the industry is making some of the right noises: What has made us increasingly confident that the industry is heading the right way operationally are recent statements by Deutsche Bank - amongst others - that they are designing their operations on the assumption of zero revenue growth and lower leverage. There is at least one outlier worthy of an explicit mention (and this is for you, Matt): Others, namely CS, seem to continue to believe that running an investment bank at 40x leverage is a viable option. Full note in the usual place. Related links: Banking Boring Again Even At Credit Suisse - Dealbreaker Credit Suisse to Cut More Costs as Quarterly Profit Falls - Bloomberg