Credit Suisse Group AG (CSGN), the second- biggest Swiss bank, increased a target for cost reductions after posting a drop in third-quarter profit on an accounting charge related to its own debt.
The bank, based in Zurich, rose as much as 3 percent in Swiss trading after saying it plans to trim a further 1 billion francs ($1.07 billion) in costs by the end of 2015. That follows the 1 billion-franc savings program announced in July and a 2 billion-franc expense reduction achieved since last year.
Chief Executive Officer Brady Dougan is cutting costs and accelerating a capital buildup as Europe’s sovereign-debt crisis curtails client activity and hurts earnings. While the investment bank benefited from the increase in asset prices that lifted profit at U.S. competitors in the quarter, margins in wealth management fell to the lowest in at least five years.
“Management is doing all the right things” in terms of shrinking the investment bank and reducing expenses, JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan said in a note to clients. We still “need to see a net improvement in underlying cost-income” ratio.
Net income fell 63 percent to 254 million Swiss francs, Credit Suisse said in a statement today. The bank booked a pretax charge of 1.05 billion francs in the quarter because of an accounting rule tied to the theoretical cost of buying back its debt as market prices fluctuate.
Net income would have amounted to 891 million francs if the charge, reorganization costs, litigation provisions and gains on the sale of businesses were excluded, the bank said. Return on equity excluding those items was 9.6 percent in the quarter.
Credit Suisse rose 2.4 percent to 21.85 francs by 12:02 p.m. in Zurich. Before today the stock gained 24 percent since July 18, when it announced plans to boost capital by 15.3 billion francs at the urging of the Swiss National Bank. The stock is down 1 percent this year, compared with a 16 percent gain in the 38-company Bloomberg Europe Banks and Financial Services Index.
Profitability in wealth management is under pressure as the erosion of bank secrecy leads to withdrawals of offshore funds from Switzerland, while stricter compliance rules and regulation are driving up costs. The gross margin in wealth management, which reflects how much the bank makes in revenue on assets under management, fell to 107 basis points in the third quarter from 120 basis points a year ago. A basis point is one hundredth of a percentage point.
“The big downside that we saw again was on the private- banking side,” Florian Esterer, a fund manager at MainFirst Schweiz AG in Zurich, said in a Bloomberg Television interview. “We see a continuous deterioration in their margins here. And we haven’t really seen anything besides some cost-cutting initiatives -- but not very forceful cost-cutting initiatives -- on the private banking side to stop that.”
Of the additional 2 billion francs in cost reductions announced in July and today, about 1.1 billion francs will come from savings in infrastructure costs, while about 700 million francs will come from the investment bank and about 100 million francs each from private banking and asset management. Chief Financial Officer David Mathers told journalists on a conference call the bank will continue cutting jobs, though it doesn’t intend to disclose a target for headcount reductions.
“We have realigned our business to better meet the demands of a changed regulatory and market environment and, in doing so, have substantially reduced risks,” Dougan, 53, said in a statement today. “At the same time, we have significantly cut costs and improved efficiencies across the bank. We are committed to deliver additional cost savings in subsequent years.”
The bank plans to trim assets on its balance sheet by 130 billion francs, or 13 percent, by the end of 2013 to reduce leverage, it said today. Credit Suisse aims to reduce risk- weighted assets at the investment bank to $180 billion in the same period from $204 billion at the end of September.
The investment bank posted a pretax profit of 508 million francs in the third quarter, compared with a loss of 720 million francs in the year-earlier period. Earnings in private banking jumped to 689 million francs from 207 million francs a year ago, when Credit Suisse booked provisions related to German and U.S. probes into alleged tax evasion by some clients. Asset management profit rose to 222 million francs from 97 million francs, helped by a 140 million-franc gain on the sale of a 7 percent stake in Aberdeen Asset Management.
Fixed-income sales and trading revenue almost tripled to 1.5 billion francs from a year earlier. Revenue from equities rose 15 percent to 1.03 billion francs and revenue from underwriting and advisory jumped 43 percent to 868 million francs.
The bank stuck with a target to reach a return on equity, a measure of profitability, of 15 percent or more over the cycle.
“As we continue to reduce costs, continue to optimize our capital and we continue to have momentum on the client side we think we will be able to improve our return on equity toward that 15 percent target,” Dougan said in an interview with Bloomberg Television. “That’s something that’s achievable.”
Credit Suisse, which announced 3,500 job cuts last year, said today it plans to achieve additional savings at the investment bank by driving synergies in the equities unit and continuing to “rationalize” businesses in some regions in fixed income, underwriting and advisory. The company will scale back support functions and coverage of offshore clients in private banking, it said.
Credit Suisse is considering selling its exchange-traded- funds business, and doesn’t plan other asset-management sales beyond the ones announced in July, the company said today.
The asset-management unit saw a net outflow of about 500 million francs in the quarter, while wealth management recorded net inflows of 5.1 billion francs, including an outflow of 3.6 billion francs from “mature markets” such as western Europe.
Credit Suisse saw 32 billion francs in outflows from “mature markets” in the three-and-a-half years through June, Mathers said at an investor presentation in New York last month. The bank’s cross-border business may see as much as 35 billion francs in further outflows in coming years, he said.
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