Credit Suisse Group AG, the second-biggest Swiss bank, posted a jump in first-quarter profit on lower costs and improved earnings at the investment bank.
Net income was 1.3 billion Swiss francs ($1.37 billion), up from 44 million francs a year before, when profit was hurt by charges related to its own debt and bonus payments, the Zurich-based bank said today. Earnings topped the 1.27 billion-franc mean estimate of 12 analysts surveyed by Bloomberg.
Chief Executive Officer Brady Dougan said the first-quarter performance shows that Credit Suisse’s strategy of cutting costs across businesses while sticking to a full-fledged investment bank as UBS AG scales back “is working.” The securities unit boosted its pretax return on Basel III capital to 23 percent in the quarter from 13 percent a year earlier.
“The result shows that the investment-banking model that they built over the past two years seems to work,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets with a “strong buy” recommendation on the stock. “The big concern was that with Basel III Swiss investment banks won’t be able to make appropriate returns anymore. Credit Suisse has shown that it’s actually possible if you reorganize the business intelligently and have some strengths to rely on.”
Credit Suisse rose 0.7 percent to 26.63 francs by 10:25 a.m. in Swiss trading, after gaining as much as 1.7 percent. The shares are up 25 percent in the past six months, compared with a 10 percent increase in the Bloomberg Europe Banks and Financial Services Index, which tracks 40 companies.
The situation in Europe, where the sovereign debt crisis is keeping markets volatile, is improving “gradually but relatively consistently,” Dougan said in a Bloomberg Television interview today.
“I think we certainly still have 12 to 18 months more to work through in terms of a number of issues in Europe,” he said. “But I do believe that over that time period we’ll start to see some real fundamental improvement in Europe, which I think will be a very positive signal for markets all around the world.”
Market conditions in April have been “pretty good” after the seasonally strong first quarter, Dougan said. “Market conditions are, I’d say, roughly equivalent to what we saw in the first quarter if you take out the very strong start to the year in January.”
The bank said it has achieved 2.5 billion francs of cost savings and is on course to meet a goal of 4.4 billion francs in cuts by the end of 2015. Credit Suisse combined its money-managing units into one division last year to boost efficiency and improve cooperation.
“Operating leverage is coming through in the investment bank with the announced cost cuts,” JPMorgan Chase & Co. analysts Kian Abouhossein and Amit Ranjan, who have an “overweight” rating on Credit Suisse, said in a note. “But we think there is more work to be done in wealth management.”
Pretax profit at the investment bank rose to 1.3 billion francs in the quarter from 907 million francs a year earlier as revenues remained almost unchanged and costs fell. The private banking and wealth management division, which encompasses all other units, saw earnings fall to 881 million from 951 million francs as profit in asset management dropped 54 percent from the year-earlier period, when it was boosted by a gain from a stake sale.
The firm attracted net new money of 12 billion francs in the quarter, including 5.5 billion francs from wealth management clients, as outflows in Western Europe were more than offset by inflows from emerging markets and so-called ultra high net worth individuals.
“The business in private banking and wealth management continues to have some headwinds with interest rates, with clients being a little bit more conservative,” Dougan said. “But we’ve taken so much market share over the past couple of years that we think we’re very well positioned. We think there is a lot of upside in that business.”
Credit Suisse agreed last month to buy Morgan Stanley’s wealth-management operations in the U.K., Italy and Dubai with about $13 billion of assets to expand in Europe and the Middle East.
Blackstone Group LP, the world’s biggest buyout firm, agreed this week to acquire Credit Suisse’s Strategic Partners unit, which buys stakes in other private-equity funds, as the Swiss bank exits more illiquid businesses after regulations such as the Volcker Rule sought to limit risk-taking by financial companies.
Dougan, 53, has said that he expects the profit contribution from the investment bank to rebound to about half of the group’s pretax earnings as competitors reorganize their businesses and markets improve. The unit contributed about 33 percent to the group’s pretax earnings in 2012.
Revenue from fixed-income sales and trading rose 3.1 percent in the first quarter from a year earlier to 1.99 billion francs, while equity sales and trading revenue fell 4.8 percent to 1.3 billion francs, the bank said. Revenue from underwriting and advisory rose 3.4 percent to 763 million francs, as increases in debt and equity underwriting were partially offset by lower fees from mergers and acquisitions.
Credit Suisse is trading at a lower price relative to earnings and book value than UBS as some investors prefer the latter’s increased focus on wealth management and question Dougan’s decision to maintain a full-service investment bank.
UBS, which reports first-quarter earnings next week, may post net income of 406.7 million francs as it books an accounting charge related to the tightening of its credit spreads, according to the mean estimate of six analysts surveyed by Bloomberg.
Credit Suisse, along with other Swiss banks aside from UBS, has been a target of a U.S. investigation into alleged tax evasion by some American clients for almost two years. The bank reiterated that it’s cooperating with U.S. authorities and said it couldn’t provide information on the timing of a resolution.
“Our hope and our expectation is that we will be able to reach a resolution,” Dougan said. “But it’s very hard to determine exactly when it’ll be or exactly what the structure of that resolution will be.”
The banks under investigation may have to negotiate a settlement under a deferred prosecution agreement, which would include a fine, admission of guilt and delivery of client data, newspaper Schweiz am Sonntag reported last month, without saying where it got the information.
Credit Suisse said it accrued funds for a resumed cash dividend in the quarter, after making part of the payouts in stock for the previous two years. The bank, which is holding its annual shareholder meeting on April 26, proposed a payout of 10 centimes in cash and 65 centimes in shares 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 increase its capital ratios.