Credit Suisse Profit Drops 34% in Quarter on Debt Trading Drag

Apr 16, 2014 8:44 am ET

April 16 (Bloomberg) -- Credit Suisse Group AG, the second- biggest Swiss bank, reported a slump in first-quarter earnings as a drop in debt trading weighed on investment-banking profit.

The stock tumbled as much as 2.8 percent in Swiss trading after Credit Suisse said net income fell 34 percent to 859 million francs ($976 million) from a year earlier, missing the 1.09 billion-franc estimate of analysts surveyed by Bloomberg.

Credit Suisse followed New York-based JPMorgan Chase & Co. and Citigroup Inc. in posting lower revenue from bond trading. Earnings at the Zurich-based bank missed estimates for a third straight quarter even as its wealth management business beat forecasts, prompting some analysts to question Chief Executive Officer Brady Dougan’s plan to stick with debt trading.

“The results today are disappointing,” JPMorgan analysts Kian Abouhossein and Amit Ranjan said in a note. “We are more concerned about the long-term investment bank strategy of Credit Suisse,” they said, adding that the bank should shrink its fixed-income business further.

Credit Suisse declined 2.1 percent to 27.25 francs by 2:42 p.m. in Zurich, valuing the company at 43.5 billion francs. The bank is valued lower than Zurich neighbor UBS AG and the gap has widened since the latter’s decision in 2012 to exit most debt trading, data compiled by Bloomberg show.

Investment Bank

The investment bank posted a 36 percent decline in pretax profit to 827 million francs, missing analysts’ estimates. Revenue from debt trading dropped 25 percent to 1.49 billion francs on a lower contribution from rates and emerging markets businesses, while equities revenue fell 7.4 percent to 1.2 billion francs.

The investment bank is “a drag on performance,” Tim Dawson, a Geneva-based analyst at Helvea SA, said in a note.

Citigroup and JPMorgan, which posted earnings earlier this month, saw the combined revenue from their fixed-income businesses fall 19 percent from a year earlier, according to data compiled by Bloomberg Industries. Bank of America Corp., which reported a first-quarter loss today, had a 15 percent decline in revenue at its fixed-income, currency and commodities sales and trading division in the quarter.

In an interview with Bloomberg Television, Dougan said results at Credit Suisse’s strategic businesses, those it intends to keep, were “very strong.”

Pretax profit at the investment bank’s strategic units declined 27 percent in the quarter and delivered a 21 percent return on capital, compared with a 28 percent return in the year-earlier quarter.

Debt Market

JPMorgan had the highest revenue from fixed income in 2013, with Citigroup posting the second-highest, in a group of nine investment banks. The two bank’s combined revenue from equity trading rose 2.8 percent from a year earlier. These figures exclude valuation adjustments.

Credit Suisse’s dependence on fixed-income is greater than that of other banks. The firm derives 27 percent of its revenue from debt trading and underwriting of debt securities, behind only Goldman Sachs Group Inc. and tied with Frankfurt-based Deutsche Bank AG and Japan’s Nomura Holdings Inc., according to data compiled by Morgan Stanley analysts.

Still, Credit Suisse ranks eighth by share of fixed-income revenue globally, having produced about one-third of the revenue made by top-ranked JPMorgan, the analysts wrote in a March report prepared with consulting firm Oliver Wyman & Co.

In equities, Credit Suisse had the second-highest market share, according to the report, with revenue last year amounting to almost as much as from fixed-income.

Wealth Management

In contrast to the investment bank, the private banking and wealth management unit -- which encompasses all other businesses -- saw earnings rise 15 percent to 1.01 billion francs, beating the 941 million-franc estimate of analysts.

“We continued to optimize resource allocation to grow our high-returning businesses, particularly in private banking and wealth management, and made progress in winding down positions in our non-strategic units,” Dougan, 54, said in the statement.

The wealth management business that Credit Suisse is keeping posted a 27 percent increase in pretax profit to 578 million francs as the unit attracted 10.6 billion francs in net new money, surpassing the 5.9 billion-franc estimate of analysts. Earnings at the corporate and institutional clients units rose 2.9 percent to 246 million francs, while asset management saw profit more than double to 141 million francs.

The bank’s Basel III common equity ratio stood at 10 percent on March 31, unchanged from the end of 2013 as Credit Suisse boosted risk-weighted assets by 13.6 billion francs, or 5.1 percent, on a fully-applied basis. The bank published today an updated long-term target for the ratio of 11 percent.

‘Negative Surprises’

“Arguably the most disappointing aspect of the results was that the capital ratio remained unchanged at 10 percent,” Dirk Becker, a Frankfurt-based analyst at Kepler Cheuvreux, said in a note. “We still like the long-term investment case, but dislike the recurrent negative surprises,” he said, adding that he will cut his 2014 earnings forecast “significantly.”

Dougan said Credit Suisse intends to deliver cash returns to shareholders “at or above 2013 levels,” after announcing plans for a dividend of 70 centimes a share for last year.

Credit Suisse earlier this month said losses in the fourth quarter were larger than previously reported after it booked charges for a probe into tax evasion by U.S. clients. The bank had already restated the results in March to reflect a legal settlement over mortgages sold to Fannie Mae and Freddie Mac.

Tax Probes

Credit Suisse has been a target of a criminal investigation by the Department of Justice since 2011 over former cross-border private-banking services to American customers. The bank said April 3 it set aside 425 million francs in provisions for the probe, in addition to 295 million francs for U.S. tax matters in 2011. It agreed to pay $196.5 million in February to settle a related investigation by the Securities and Exchange Commission.

Dougan, testifying at a Senate subcommittee hearing in Washington in February, apologized and deflected blame onto a small group of employees for helping clients evade taxes. The subcommittee said in a report that 1,800 Credit Suisse employees helped Americans open 22,000 accounts, most of which were hidden from the Internal Revenue Service.

New York’s top banking regulator sent a subpoena to Credit Suisse last week as he examines whether the private bank helped clients evade state taxes, according to a person with knowledge of the matter.

Dougan said the bank is providing information to the New York regulator on the probe and that it’s “working very hard” to resolve the Justice Department investigation. “It continues to be difficult to estimate when it will be resolved and what the form of the resolution will be,” he said.