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Credit Suisse Posts 74% Profit Drop on Lower Trading

By Elena Logutenkova - 2010-10-21T07:55:27Z

Credit Suisse Group AG, Switzerland’s second-largest bank, reported a 74 percent slump in third- quarter profit, missing analysts’ estimates as lower client activity curbed trading revenue.

Credit Suisse fell as much as 3.9 percent in Swiss trading after saying net income fell to 609 million Swiss francs ($630 million) from 2.35 billion francs a year earlier. Analysts surveyed by Bloomberg estimated the Zurich-based bank would post earnings of 861 million francs.

Chief Executive Officer Brady Dougan said the quarter was characterized by “challenging conditions with low market volumes and subdued client activity,” and reiterated the bank’s intention to boost market share at the investment bank. The slump in trading also hurt revenue at U.S. competitors, including Goldman Sachs Group Inc. and Morgan Stanley.

“Credit Suisse earnings don’t look very good,” said Teresa Nielsen, an analyst at Vontobel Holding AG. “All U.S. banks except for Morgan Stanley did better.”

Credit Suisse’s trading revenue slumped 41 percent to 2.54 billion francs, missing analysts’ forecast for about 3 billion francs. Goldman Sachs, Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley, all based in New York, as well as Charlotte, North Carolina-based Bank of America Corp., on average reported a 24 percent decline in trading revenue in the third quarter from a year earlier, data compiled by Bloomberg show.

Credit Suisse fell 1.29 francs, or 3 percent, to 42.05 at 9:27 a.m. in Zurich trading. The stock is down 18 percent this year, compared with a 2.3 percent decline in the 54-company Bloomberg Europe Banks and Financial Services Index. UBS AG, the largest Swiss bank, has gained 8.8 percent this year.

Hiring

“July was particularly and perhaps abnormally weak, especially in investment banking,” David Mathers, Credit Suisse’s chief financial officer, told journalists on a conference call. “August was also weak, but I think that would be more what you’d expect given the normal seasonal patterns. And then September did show some improvement from that.”

Client activity in October so far has been “more in line with September,” Mathers said. He added that the bank is seeing benefits from recent hiring for the securities unit, while earnings were burdened in the quarter by the strengthening of the Swiss franc against the U.S. dollar.

Debt and Equities

The equities sales and trading business, which posted the second-highest revenue in the first half of the year behind Goldman Sachs, saw revenue drop 41 percent to 1.08 billion francs in the quarter, the lowest level since the end of 2008.

Fixed-income sales and trading revenue slumped to 1.46 billion francs from 2.48 billion francs a year ago. The results were helped by “strong” revenue in U.S. residential mortgage- backed securities trading and credit businesses, the bank said.

Credit Suisse aims to be in the top five in all regions in credit, rates and foreign-exchange trading, Dougan, 51, told investors in London last month. The bank increased sales headcount by 25 percent, 32 percent and 35 percent in those areas, respectively, this year.

The investment bank’s pretax profit dropped 77 percent to 395 million francs, missing analysts’ estimates of 756 million francs. Earnings at the wealth management unit fell 15 percent to 612 million francs, while the business attracted 12.4 billion francs in net new assets. Corporate and institutional clients unit posted a 56 percent jump in profit to 224 million francs, and asset management’s earnings fell 57 percent to 135 million francs.

Capital

The bank, which survived the credit crisis without government assistance, said this month it expects to meet new regulatory capital requirements without having to sell new shares or to “materially” change its growth plans and dividend policies.

A Swiss government-appointed panel proposed that the two biggest Swiss banks need to hold almost double the capital required under Basel III rules. By 2019, the lenders need to have a common equity ratio of at least 10 percent, compared with 7 percent under Basel III rules, and total capital equal to at least 19 percent of risk-weighted assets, compared with Basel’s 10.5 percent requirement.

Credit Suisse had a Tier 1 capital ratio of 16.7 percent at the end of the third quarter, compared with 16.3 percent three months earlier.

The bank may reach a common equity capital ratio of about 12 percent in 2013 if its earnings are in line with analysts’ expectations and it pays out about 30 percent in dividends, according to Mathers’ presentation slides. That ratio would still be more than 10 percent if net income is 50 percent lower, the slides show.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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Brady Dougan, Chief Executive Officer Of Credit Suisse AG

Adrian Moser/Bloomberg

The bank, reported a 74 percent slump in third-quarter profit, missing analysts’ estimates as lower client activity curbed trading revenue.

The bank, reported a 74 percent slump in third-quarter profit, missing analysts’ estimates as lower client activity curbed trading revenue. Photographer: Adrian Moser/Bloomberg

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