Credit Suisse Profit Misses Estimates on Legal Provisions

Feb 06, 2014 8:48 am ET

(Updates with CEO comments starting in 10th paragraph.)

Feb. 6 (Bloomberg) -- Credit Suisse Group AG, the second- biggest Swiss bank, posted fourth-quarter profit that missed analysts’ estimates after setting aside 514 million Swiss francs ($568 million) for U.S. tax and mortgage litigation.

Net income was 267 million francs, the Zurich-based bank said today in a statement. That compares with a 263 million- franc profit a year ago and the 398 million-franc average estimate of 12 analysts surveyed by Bloomberg.

Credit Suisse put aside funds to cover potential costs related to a Securities and Exchange Commission investigation into whether the bank broke regulations while offering American clients banking services. The bank, under investigation for allegedly helping Americans evade taxes, already set aside 295 million francs for U.S. tax matters in 2011. The provisioning contributed to a pretax loss at the investment bank and lower profit at the wealth management division in the quarter.

“We haven’t seen the last of these provisions on U.S. mortgage and tax issues,” said Andrew Stimpson, a London-based analyst with Keefe, Bruyette & Woods who rates the stock outperform.

Credit Suisse declined as much as 2.9 percent in Swiss trading, and was 0.6 percent lower at 26.88 francs by 2:09 p.m. The Bloomberg Europe Banks and Financial Services Index, which tracks 43 companies, rose 1.1 percent.

Credit Suisse proposed paying a dividend of 70 centimes a share in cash for 2013, less than the 76 centime-a-share average estimate of 26 analysts surveyed by Bloomberg. The company paid dividends partially in shares for the past two years to build up capital.

Making Progress

The investment bank reported a pretax loss of 40 million francs in the quarter after provisions of 339 million francs related to mortgage litigation. The bank had profit before tax of 298 million francs a year earlier.

The private banking and wealth management division, which encompasses all other businesses, reported pretax earnings of 870 million francs. Profit fell 4.5 percent from 911 million francs a year earlier, after a 175 million-franc provision related to the SEC probe, where the bank is “working toward a resolution.” The U.S. Department of Justice is also investigating whether the bank helped Americans dodge taxes.

“It’s been a long-running issue, something that we’ve been working hard on,” Chief Executive Officer Brady Dougan said in a Bloomberg Television interview. “The reserves that we’re taking today against the SEC element of it, which is more the securities and the licensing issues on the cross-border issue, do represent the fact that we’re making some progress towards getting a resolution to that portion of the issue.”

Legal Matters

Dougan said the U.S. tax investigation and mortgage litigation, primarily the lawsuit by the Federal Housing Finance Agency, are the most important legal issues the bank is facing. The company doesn’t see any “material exposure” to investigations into possible manipulation of currencies and interest rates, he told journalists at a press conference. It’s hard to predict future charges for litigation, he said.

Credit Suisse took 1.1 billion francs in legal provisions in 2013. It also increased the risk weightings assigned to legal and compliance matters because of a review by the Swiss regulator. The review led to a $6 billion add-on to operational risk-weighted assets in the fourth quarter, the bank said. That brought the increase in operational risk-weighted assets to almost 17 billion francs, or 47 percent, since the end of 2011 to 53.1 billion francs. As risk-weighted assets rise, banks must hold more capital to make sure reserves meet requirements.

New Money

Credit Suisse attracted 1.7 billion francs of net new funds from wealth management clients in the quarter as outflows in Switzerland and Europe offset additions in the Americas and the Asia Pacific region. The net inflow compares with an average of 5.4 billion francs over the previous seven quarters, and relate to the part of the business Credit Suisse is keeping.

Dougan, 54, last year created non-strategic units within the bank’s divisions to speed up its exit from some businesses and boost profitability. Credit Suisse is scaling down its interest-rate trading business within the investment bank, while in wealth management the company is ending relationships with offshore clients from 83 countries with cumulative assets under management of about 3 billion francs. In December, it agreed to sell its German onshore private bank to ABN Amro Group NV.

Investment Bank

The bank for the first time reported quarterly figures for strategic and non-strategic operations today, in addition to the figures it publishes for entire businesses, “core” businesses and so-called “underlying” results, which exclude certain gains and charges.

“Credit Suisse has managed the considerable achievement of making its reporting even more complex,” Tim Dawson, a Geneva- based analyst with Helvea SA, said in a note today. “This is well-intentioned with the aim of giving investors a picture of the true trends of the business but it is now just creating confusion. We believe that the group would be well-advised to stop this.”

Credit Suisse said last month it will reduce assets in the non-strategic units more quickly than previously announced. The company booked a pretax loss of 525 million francs in the non- strategic unit of its investment bank, and said the strategic businesses posted a profit of 485 million francs in the quarter, a decline of 35 percent from a year earlier.

Revenues from fixed-income trading slumped 32 percent from a year earlier to 808 million francs in the quarter at the strategic unit, while equities revenue jumped 21 percent to 1.09 billion francs. Fees from underwriting and advisory declined 3.2 percent to 951 million francs.

‘Structural Problem’

“Investment bank results raise the question if Credit Suisse has a structural problem in this business segment,” Rainer Skierka, an analyst with J. Safra Sarasin Holding Ltd, said in a note today, adding that he’s “concerned” about the securities unit. “We think it’s too early to buy into Credit Suisse’s turnaround at this stage.”

JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp., Morgan Stanley and Deutsche Bank reported a 7.7 percent decline in cumulative fourth-quarter revenue from fixed income and a 5.2 percent gain in equities revenue, compared with a year earlier, data compiled by Bloomberg Industries show. The figures exclude valuation adjustments. The cumulative revenue at the firms from advising on mergers and acquisitions and underwriting of stock and bond sales gained 8.4 percent in the quarter, the data show.

Wealth Management

At the private banking and wealth management division, the non-strategic unit booked a pretax loss of 187 million francs. Within the businesses that Credit Suisse is keeping, wealth management posted a 1.7 percent decline in pretax profit to 475 million francs, while the corporate and institutional clients unit saw earnings fall 14 percent to 213 million francs and asset management posted a 24 percent gain to 369 million francs.

Asset management and non-strategic businesses saw outflows of about 500 million francs and 1 billion francs in the quarter, respectively, while the corporate and institutional clients unit added 4 billion francs in net assets.

The gross margin in wealth management, which shows how much revenue the bank makes on assets under management, fell to 104 basis points in the fourth quarter from 109 basis points a year earlier. A basis point is one hundredth of a percentage point.

Dougan said the decline reflects the bank’s strategy to move toward the ultra-high net worth client business, which brings lower revenues and higher profits.

UBS AG, the biggest Swiss bank, posted a fourth-quarter profit this week that beat analysts’ estimates, helped by higher earnings at its main divisions as well as lower legal costs and a tax gain. The company plans to increase its dividend for 2013 by 67 percent to 25 centimes per share.

Deutsche Bank AG, Germany’s biggest bank, last month posted a fourth-quarter loss on legal costs and accounting charges. Deutsche Bank paid in the period to settle a lawsuit alleging it deceived clients about products linked to U.S. mortgages and a probe into traders colluding to rig benchmark interest rates.

--With assistance from Giles Broom in Geneva and Manus Cranny in London. Editors: Frank Connelly, Mark Bentley