Credit Suisse Posts First Loss in Three Years on Investment Bank Overhaul
Credit Suisse Group AG (CSGN), the second- biggest Swiss bank, said it had a loss in the fourth quarter for the first time since 2008, hurt by “adverse” markets and costs to reorganize the investment bank.
Credit Suisse fell the most in five weeks in Zurich trading after posting a net loss of 637 million Swiss francs ($698 million), compared with an 841 million-franc profit in the year- earlier period. That missed the 446 million-franc average profit estimate of nine analysts surveyed by Bloomberg.
Credit Suisse Chief Executive Officer Brady Dougan said measures taken to accelerate a revamp of the investment bank hurt earnings in the quarter. Dougan, who lowered the company’s profit target and announced two rounds of job cuts last year, is scaling down the securities division as the European sovereign debt crisis and stricter capital requirements crimp earnings. Pretax profit at the private bank slumped 43 percent with “subdued” client activity in the fourth quarter.
“These were very weak results by any standards,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA who has a “neutral” rating on the stock. “Given the decline in profitability in wealth management, it’s clear there are problems across the board.”
Credit Suisse fell as much as 4.9 percent and was down 2.4 percent to 24.62 francs as of 10.55 a.m. in Zurich, paring this year’s gain to 12 percent. The stock was the second-worst performer today on the 43-company Bloomberg Europe Banks and Financial Services Index, which rose 1.2 percent.
Dougan said the bank has made a “good start” to 2012.
“The economic conditions, market conditions so far this year are beginning to increase confidence in our clients, both our corporate clients and our individual clients, throughout our business,” Dougan said in an interview with Bloomberg television in Zurich. “We’ve seen clearly better client activity, better activity in general.”
The company will propose a cash distribution to shareholders of 75 centimes a share for 2011, down from 1.30 francs a share for the previous year, the Zurich-based bank said in a statement today.
Credit Suisse said in November it will cut risk-weighted assets by 110 billion francs, including some 99 billion francs at the investment bank’s fixed-income unit, by the end of 2014. About 80 billion francs of risk-weighted asset reductions were planned for this year. The bank now aims to complete the plan for 2012 by the end of the first quarter.
The acceleration of the risk-reduction plan and charges for job cuts cost the bank 981 million francs in the fourth quarter. The firm announced 3,500 job cuts last year to help it save about 2 billion francs in annual costs by the end of 2013.
Credit Suisse cut its total bonus pool for 2011 by 41 percent to 3 billion francs, including about 500 million francs that will be awarded in bonds linked to derivatives, which were designed to help the bank cut risk-weighted assets and boost its capital position. These bonds will be expensed in the first quarter, when the bank will also see the effect from risk reduction, Dougan said.
“Our performance for the fourth quarter 2011 was disappointing,” Dougan said in the statement. “It reflects both the adverse market conditions during the period and the impact of the measures we have taken to swiftly adapt our business to the evolving market and regulatory requirements.”
Investment Bank Loss
Credit Suisse’s investment bank reported a pretax loss of 1.31 billion francs, its second consecutive quarterly loss, as revenues slumped 64 percent in the fourth quarter. Revenue from debt trading at 36 million francs in the quarter was hurt by 469 million francs in losses related to businesses the bank is exiting and the reduction in risk-weighted assets, it said. The securities unit’s risk-weighted assets were cut by 35 billion francs in the fourth quarter on a Basel III basis. Revenue from the sales and trading of equities dropped 45 percent to 758 million francs.
“We are worried about operational performance, in particular the ongoing investment bank underperformance even in the historically strong equity franchise,” JPMorgan Chase & Co. analysts led by Kian Abouhossein said in a note. “In addition, we see continued structural headwinds on an inflexible cost base considering no profit generation in the investment bank.”
UBS reported two days ago a 76 percent drop in fourth- quarter profit and a 256 million-franc pretax loss at the investment bank as the debt crisis curbed trading. Deutsche Bank AG (DBK), Germany’s biggest bank, recorded a 76 percent slump in quarterly earnings last week as its investment bank posted a 422 million-euro ($560 million) pretax loss.
Dougan, 52, cut Credit Suisse’s profitability goal last February, blaming stricter capital requirements. The bank now aims for a return on equity of more than 15 percent over the next three to five years, down from a previous goal of more than 18 percent. The return on equity in 2011 was 6 percent.
The private bank saw pretax profit drop to 467 million francs in the fourth quarter. The division added 7.6 billion francs in net new money from clients in the quarter. Earnings in asset management slumped 52 percent to 87 million francs, as clients removed a net 9.6 billion francs in the quarter.
Credit Suisse is seeking to boost the private bank’s pretax profit by 800 million francs by 2014 as sluggish client activity squeezes margins. The bank said in November it will integrate its Clariden Leu unit with the rest of the private-banking division to reduce costs.
The bank plans to expand the business with ultra-high-net- worth individuals and with clients who book assets in their countries of residence. Hans-Ulrich Meister, who has been heading the private bank since August, is also splitting the European wealth-management business into two units to focus on diverging trends in emerging and mature markets.
Credit Suisse agreed in September to pay 150 million euros to settle proceedings in Germany against employees probed for allegedly helping German clients evade taxes. The bank also set aside 295 million francs for U.S. tax matters in the third quarter.
The firm looked at the level of litigation provisions at the end of the year and didn’t see any reason to book additional charges, Chief Financial Officer David Mathers told reporters on a conference call today.
The bank is a target of a criminal investigation by the U.S. Department of Justice over former cross-border private- banking services to American customers, the company said in July. Eight bankers, including Credit Suisse’s former head of North America offshore banking, were charged with conspiring to help American clients evade taxes through secret bank accounts.
Credit Suisse is doing “everything” it can to resolve the U.S. probe, Dougan said in an interview. While it’s “hard to speculate,” he said the cost to Credit Suisse of resolving the issue “could be” higher than the third-quarter provision.
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