(Updates with estimate for outflows in 17th paragraph.)
Feb. 7 (Bloomberg) -- Credit Suisse Group AG, Switzerland’s second-largest bank, raised its target for cost reductions for a third time in seven months as it posted fourth-quarter earnings that fell short of analysts’ estimates.
Credit Suisse will seek an additional 400 million Swiss francs ($441 million) in cost savings by the end of 2015, on top of 4 billion francs in planned cuts announced since 2011, the Zurich-based company said today.
Chief Executive Officer Brady Dougan said in an interview with Bloomberg Television that the measures the bank has already taken put it in a position to “thrive” regardless of market conditions. The company’s fourth-quarter net income of 397 million francs compared with a year-earlier loss and the 647.6 million-franc estimate of analysts surveyed by Bloomberg.
“We’re coming into 2013 very well positioned, having done a lot of hard work of reducing costs, of reducing our risk- weighted assets,” Dougan, 53, said in the interview. “We really have a business model that’s ready to perform I think quite well and resiliently in 2013 and beyond.”
Credit Suisse was down 0.9 percent to 26.77 francs by 2 p.m. Before today, the stock had risen 59 percent over the past six months, compared with a 26 percent gain in the 40-company Bloomberg Europe Banks and Financial Services Index.
The bank proposed to pay 10 centimes in cash and 65 centimes in shares as its dividend for 2012 after letting shareholders choose the previous year whether they wanted 75 centimes a share in cash or in stock to help the company build up capital ratios.
Dougan foresees a “material distribution of capital” once the bank meets its target for a capital ratio under Swiss standards of 10 percent, he said in the interview. The ratio stood at 9.4 percent at the end of 2012 and the company intends to meet the goal in the middle of this year.
Credit Suisse reaffirmed in November its commitment to a fully-fledged investment bank after UBS AG, the biggest Swiss bank, said it would cut 10,000 jobs and shrink debt trading to focus on money management. UBS earlier this week posted a net loss of 1.89 billion francs after booking a fine for trying to rig global interest rates and costs tied to the reorganization.
Pretax earnings at Credit Suisse’s investment bank amounted to 298 million francs in the quarter, compared with a loss of 1.43 billion francs a year earlier. Revenues at the investment bank fell 16 percent to 2.66 billion francs in the quarter from the previous three months, with fixed-income revenues dropping 39 percent to 887 million francs.
“Revenues and pretax profit from the investment bank was clearly weaker than expected,” Teresa Nielsen, a Zurich-based analyst at Vontobel with a hold rating on Credit Suisse, said in a note to investors. “Especially fixed income disappointed. The bank still needs to work on its capitalization and we expect asset sales and derisking to continue.”
Credit Suisse said today it aims to lower the cost-to- income ratio at the investment bank to 70 percent in 2015 from 84 percent last year by cutting expenses and boosting revenue through growth initiatives and a reduced drag from about $13 billion in risk-weighted assets the bank still needs to wind down. The bank cut those risk-weighted assets from $48 billion at the end of 2011.
So far in 2013, revenue has been “consistent with the good starts we have seen to prior years,” said Dougan in the statement. The bank has a “constructive” view on the global economic outlook and its impact on business this year, he said in the interview.
He has said he expects the profit contribution from the investment bank to rebound as competitors reorganize and markets improve. The unit, which contributed about 33 percent to the group’s pretax earnings in 2012, should be making about half the profits in the future, he said in November.
The bank also combined its wealth management, corporate and institutional clients and asset management units in one division to save costs and improve cooperation. The combination will lead to the additional 400 million francs of savings announced today.
Pretax earnings at this combined division rose 71 percent to 911 million francs in the fourth quarter as costs fell and revenues from the asset management and corporate and institutional client units rose.
Revenues in wealth management are under pressure from subdued client activity, low interest rates and withdrawals of funds by rich clients from markets such as western Europe. Gross margin, which reflects how much the bank makes in revenue on assets it oversees, fell to 110 basis points in the quarter from 115 basis points a year earlier. A basis point is one hundredth of a percentage point. UBS also reported narrower gross margins when it published results earlier this week.
Credit Suisse’s wealth management clients added a net 2.9 billion francs in new funds in the quarter, below analysts’ forecasts for 5 billion francs, restrained by 4.4 billion francs of outflows in western Europe. Dougan told analysts on a conference call that the bank expects as much as 20 billion francs in further outflows over the coming two to three years.
Credit Suisse foresees net new money in wealth management of 3 percent to 4 percent of total assets under management annually from this year through 2015, below the long-term target of 6 percent, as outflows from the western European cross-border business may amount to 5 percent to 10 percent of assets.
“Wealth management net new money continues to disappoint with wealth management margin also on the disappointing side,” Cormac Leech, a London-based analyst at Liberium Capital Ltd., said in a note. He has a hold recommendation on the stock.
Credit Suisse agreed last month to sell its exchange-traded funds unit with $17.6 billion in assets under management to BlackRock Inc. after deciding that it won’t be able to expand the business quickly enough to make it profitable. The bank also said in July it would seek to sell two private-equity units to comply with new limits on investments in hedge funds and private-equity funds.
The bank proposed the election of Kai S. Nargolwala to the board of directors at the company’s annual general meeting on April 26. Nargolwala was a member of Credit Suisse’s executive board and the CEO of the Asia-Pacific business from 2008 to 2010, after which he was the chairman of the business in the region until 2011.
Credit Suisse will also propose the re-election of Jassim Bin Hamad J.J. Al Thani and Noreen Doyle to the board, while Robert H. Benmosche, Aziz R.D. Syriani and David W. Syz will be retiring due to the statutory age limit.
--With assistance from Zoe Schneeweiss in Vienna, Paul Verschuur and Matthias Wabl in Zurich and Caroline Hyde in London. Editors: Frank Connelly, Stephen Taylor