Credit Suisse CEO Sees 15% ROE Target Over Cycle Achievable

Credit Suisse Group AG (CSGN) Chief Executive Officer Brady Dougan said the bank’s recent cost- cutting and reorganization will allow it to achieve its target of 15 percent return on equity over the business cycle.

“We have seen a strong start to the year, and we’re confident that our cost and capital-efficient business model will continue to deliver strong and consistent revenues across our businesses,” Dougan said in a prepared speech for a shareholder meeting in Zurich today. “We believe we are well- positioned to effectively serve our clients, to further drive market share gains and to deliver superior returns to our shareholders.”

Credit Suisse posted a jump in first-quarter profit this week on lower costs and improved earnings at the investment bank. Return on equity in the first quarter, which is traditionally the strongest of the year, was 14 percent. Chairman Urs Rohner reiterated in his speech to shareholders the firm’s commitment to the investment bank and fixed-income business in particular, saying Credit Suisse will be able to deliver “attractive returns” while withdrawing from businesses that can’t cover their cost of capital.

“We are not yet satisfied,” he said. “We want to deliver further improvements.”

Credit Suisse gained 26 percent in Zurich trading over the past six months. The increase compared with an 11 percent advance for the Bloomberg Europe Banks and Financial Services Index, which tracks 40 companies.

Pay Initiative

Implementation of the so-called Minder initiative on pay will make company law in Switzerland “very rigid” in terms of corporate governance issues, Rohner said. In a referendum last month, Swiss voters approved a proposal giving shareholders a binding vote each year on executive pay as part of an initiative that also bans big payouts for new hires and departing executives.

Some shareholder groups have been recommending investors oppose the bank’s compensation report in today’s consultative vote. The report was approved with 88 percent of votes after 68 percent voted in favor last year. Investors in Julius Baer Group Ltd. (BAER) rejected the company’s pay report in a non-binding vote earlier this month.

‘Excessive’ Bonuses

Credit Suisse said in March that it changed the compensation structure for executives after feedback from shareholders. Executive bonuses for 2012 were made up of short- term awards, which included unrestricted cash and shares vesting over the coming three years, and a long-term deferred cash award vesting in the third, fourth and fifth years. The bank also published target and cap bonus levels for the CEO and executive board members, expressed as multiples of base salary, and said they can be cut to zero should goals not be met.

“Credit Suisse is now one of the first banks to introduce such a cap,” Ethos Foundation, which advises more than 60 Swiss pension funds, said in a statement last week.

While commending Credit Suisse for the cap, it advised investors to reject the pay report.

“It is now possible to calculate the maximum potential remuneration of the executive management,” the foundation said. “For 2013, the maximum variable remuneration of Brady Dougan, the CEO, will be capped at 6 times his base salary, which Ethos still considers as excessive.”

Credit Suisse raised Dougan’s total compensation by 34 percent for 2012, a year when net income declined. The pay included a fixed salary of 2.5 million francs, 3 million francs in short-term and 2 million francs in long-term variable compensation.

Shareholder Returns

Dougan has said that while pay for bankers is still outpacing shareholder returns, the dynamic will change once Credit Suisse completes an overhaul of its business model.

“There does need to be fair sharing between shareholders and employees in terms of the rewards that come from the business,” Dougan said in a Bloomberg Television interview after first-quarter earnings were published on April 24. “We’re going to continue to do everything we can to make sure that we’re aligning our employees, and particularly our management, with our shareholders and really make sure we have a compensation system that works to maximize our shareholders’ return.”

The bank proposed to pay 10 centimes in cash and 65 centimes in shares as its dividend for 2012 after letting shareholders choose the previous year whether they wanted 75 centimes a share in cash or in stock to help the company build up capital ratios. If shareholders approve the dividend at today’s meeting, they will receive one new share for every 41 shares they hold.

ISS Recommendation

While proxy adviser Institutional Shareholder Services Inc. recommended investors approve the compensation report, it advised voting against a proposal to increase conditional capital to be able to deliver stock to employees. Last year, staff agreed to convert future payments from a previous bonus plan into Credit Suisse shares to help the bank raise capital. ISS and other groups including Ethos cited shareholder dilution as the reason for their views.

Rohner, replying to ISS’s recommendation in a letter to shareholders, said that the measure should be viewed as part of a plan to boost capital rather than compensate employees. The bank also has said that it plans to restart buying shares in the market to meet delivery obligations under stock awards after its capital ratio exceeds the target.

Shareholders approved the increase in conditional capital with 75 percent of votes, while 24 percent voted against the motion.

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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