Credit Suisse Group AG (CSGN), the second-biggest Swiss bank, posted a smaller increase in third-quarter profit than analysts estimated as earnings at the investment bank tumbled on lower revenue from debt sales and trading.
The bank, based in Zurich, fell as much as 2.8 percent in Swiss trading after reporting net income of 454 million francs ($509 million), less than the 724 million-franc average estimate of nine analysts surveyed by Bloomberg.
“The results are very disappointing,” said Dirk Becker, a Frankfurt-based analyst at Kepler Cheuvreux with a buy recommendation on the stock. “Credit Suisse has been promising us for years a business model that would deliver stable earnings throughout the cycle. And again we have such a strong slump at the investment bank.”
Chief Executive Officer Brady Dougan is cutting costs across the company and scaling down debt trading at the investment bank. Credit Suisse is aiming for a 50-50 split in risk-weighted assets between the investment bank and its money management units, compared with 63 percent used by the securities business at the end of June. The bank is creating a unit to hold parts of its rates business and other fixed-income assets to wind them down.
Credit Suisse fell 2.3 percent to 29.17 francs at 9:56 a.m. in Zurich trading. Before today, the shares had gained 40 percent over the previous 12 months, compared with a 53 percent increase at UBS AG (UBSN), which last year decided to exit most of debt trading to focus on managing money for the wealthy. The Bloomberg Europe Banks and Financial Services Index, which tracks 44 companies, rose 24 percent over the same period.
Dougan, in an interview with Bloomberg Television, described the third-quarter performance as “solid” in “a more challenging quarter for the industry as a whole.” The fixed-income business at the investment bank was particularly challenged, he said.
Credit Suisse is creating units for non-strategic activities within both its divisions to accelerate the reduction of costs and capital deployed. It plans to bring the company’s total risk-weighted assets down to 250 billion francs from 261 billion francs at the end of September.
“The market was hoping for a more aggressive shrinkage in the investment bank,” Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. said in a note today. “The mix of 50-50 investment bank capital versus stable business in the long-term to us is not going far enough considering the investment bank remains almost double the size of UBS in terms of risk-weighted assets. We would have liked and expect in the long term further investment bank restructuring.”
The non-strategic unit in private banking will include positions related to the restructuring of the former asset management divisions, selected cross-border business Credit Suisse is exiting, litigation costs, including those related to the U.S. tax probe, as well as the impact from a restructuring of the German onshore business.
At the securities division, the bank plans to scale down its rates business, which focuses on government bonds and interest rate swaps and options, to improve returns. In cash products, it will focus on high-volume electronic trading, while the derivatives business will be geared toward simplified products. The reorganization will lead to a $7 billion reduction in risk-weighted assets and a $60 billion reduction in Swiss leverage exposure, the bank said.
“By downsizing the investment bank further, we think Credit Suisse could ‘reveal’ the higher returns of asset and wealth management,” Morgan Stanley analysts Hubert Lam and Huw van Steenis said in a note this month.
The outlook for the rates business is “challenging” given the possibility of the U.S. Federal Reserve paring down its monthly pace of asset purchases and investors looking to switch from bonds to stocks, according to Morgan Stanley analysts. Rates had the lowest rolling four-quarters’ return on equity among investment bank businesses as of the end of September, Credit Suisse’s slides showed.
Chief Financial Officer David Mathers said on a conference call with journalists today that there will “certainly” be job losses at the rates business and supporting functions related to the reorganization, declining to provide numbers.
The investment bank saw its pretax profit fall 53 percent in the third quarter to 229 million francs from 483 million francs a year earlier as revenue from fixed-income sales and trading slumped 42 percent to 833 million francs. Revenue from equities rose 8.3 percent to 1.07 billion francs.
“We have seen continued volatile fixed-income market conditions in July and August, which has exacerbated the normal seasonal slowdowns in trading volumes, and thus adversely impacted our fixed-income business,” Mathers told investors at a conference last month.
The company is seeking to cut 4.5 billion francs in annual costs by the end of 2015, with most of the remaining reductions happening at the private banking and wealth management business and in shared services. So far cuts have reached 3 billion francs. The bank increased the target from 4.4 billion francs.
The private banking division will meet its cost-savings goal, Hans-Ulrich Meister, co-head of private banking and wealth management, told Swiss newspaper Finanz und Wirtschaft in an interview this month. As part of the effort to make business more efficient, the bank is ending relationships with offshore clients from more than 50 smaller countries, Meister said.
Credit Suisse is considering the sale of part of its wealth management business in Germany, three people with knowledge of the matter, who asked not to be identified because the deliberations are private, said in June. The bank may focus on ultra-rich clients and sell the remainder, said two of the people. Dougan said today the bank is still considering various options for the business.
The private banking and wealth management division saw its pretax profit increase 8.8 percent to 1.02 billion francs in the third quarter from 936 million francs a year earlier as all businesses posted increases. The division attracted 8.1 billion francs in net new assets in the quarter, with 3.2 billion francs coming from wealth management clients.
The gross margin in the wealth management business, which shows how much the bank earns on assets under management, fell to 105 basis points in the quarter from 111 basis points in the second quarter. That’s the lowest level since at least 1998, according to Kepler Cheuvreux’s Becker. A basis point is one hundredth of a percentage point.
Credit Suisse needs to resolve a U.S. investigation into whether some of its private bankers may have helped American clients evade taxes. The bank has been a target of a criminal investigation by the Department of Justice over former cross-border private-banking services to American customers since at least July 2011. About a dozen other Swiss banks are also being investigated.
“It continues to be something that we work on and frankly it’s unclear when we’ll be able to reach a resolution,” Dougan said of the U.S. probe. “We’ll obviously be working as hard as we can toward it.”