Credit Suisse Group AG, the second-biggest Swiss bank, posted a smaller increase in third-quarter profit than analysts estimated and said it will scale back its interest-rates trading business.
The bank, based in Zurich, fell as much as 3.5 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.”
The fixed-income business had an especially challenging quarter as client activity slowed during a difficult period for the industry, Chief Executive Officer Brady Dougan said in an interview with Bloomberg Television. There has been “a slight improvement” in the markets recently, though it remains to be seen if it will last, Dougan said later on a conference call.
Credit Suisse fell 2.8 percent to 29 francs by 1:53 p.m. in Zurich trading. The shares gained 39 percent over the past 12 months, compared with a 53 percent increase at UBS AG, the largest Swiss bank. UBS decided last year to exit most of its fixed-income trading to focus on managing money for the wealthy.
Dougan, 54, is scaling back debt trading at the investment bank and cutting costs company-wide to improve profitability. 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 company aims to boost its underlying return on equity, a measure of profitability, to more than 15 percent compared with 10.6 percent in the first nine months of this year and 10.4 percent in 2012.
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 to clients 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.”
At the securities division, the bank will transfer 10 billion francs of risk-weighted assets including parts of the rates business, which focuses on government bonds and interest rate swaps and options, to the non-strategic unit. The remaining rates business will have a higher return on equity, according to Credit Suisse.
In cash products, it will focus on high-volume electronic trading, while the derivatives business will be geared toward simplified products that would mostly be centrally cleared. The reorganization will lead to a $7 billion reduction in risk-weighted assets by the end of 2015 from $16 billion at the end of September at the rates business and a $60 billion reduction in Swiss leverage exposure over the coming years, 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’s pretax profit fell 53 percent in the 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.
Competitors also had declines in the debt business in the period. JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley reported a 25 percent decline in cumulative third-quarter revenue from fixed income and a 9.7 percent gain in equities, compared with a year earlier, data compiled by Bloomberg Industries show. The figures exclude valuation adjustments.
Credit Suisse 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 is ending relationships with offshore clients from 83 countries with cumulative assets under management of about 3 billion francs, Mathers said. The bank will be repositioning its onshore businesses in markets including the U.S. and Germany, and plans to expand in profitable markets such as Italy and Spain, Mathers said. It also plans to increase lending to ultra-high-net-worth individuals, especially in emerging markets, to boost profitability.
The non-strategic unit in private banking will include positions related to the reorganization of the former asset management divisions, select cross-border businesses 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.
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.
Pretax profit at the private banking and wealth management division increased 8.8 percent to 1.02 billion francs in the third quarter from 936 million francs a year earlier. All businesses posted increases in profit as asset management boosted revenues from a year earlier, while the wealth management and corporate and institutional clients units cut costs.
The division attracted 8.1 billion francs in net new assets in the quarter, with 3.2 billion francs from wealth management clients as inflows in Asia Pacific and the Americas were partly offset by 2.3 billion francs in outflows from western European cross-border businesses.
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.”