Credit Suisse Falls as Capital Concern Overshadows ProfitJeffrey Vögeli and Elena Logutenkova
Credit Suisse Group AG fell the most since January in Zurich trading after the bank said a key measure of financial strength dropped in the first quarter, stoking concerns it may have to boost capital.
The ratio of capital to risk-weighted assets was at 10 percent, down from 10.1 percent at the end of 2014, the bank said in a statement Tuesday. The firm targets 11 percent. Net income in the period rose 23 percent to 1.05 billion Swiss francs ($1.1 billion) on increased trading activity.
Credit Suisse has been cutting assets at the investment bank, announcing fresh cuts in February, to improve buffers needed to withstand potential losses. Investors are betting Chief Executive Officer Brady Dougan’s successor, Tidjane Thiam, 52, will downsize Switzerland’s second-biggest bank more decisively to focus on money-managing businesses when he takes over in June.
Capital, “already a concern for the market, went backwards in the quarter with further headwinds to come,” Omar Fall, an analyst at Jefferies Group LLC in London, said in a note to clients. “The risk is that the debate around the incoming CEO shifts from the potential for strategic change to the risk of capital raising.”
Shares dropped as much as 3.3 percent and were down 2.8 percent at 26.06 francs as of 1:38 p.m. in Zurich.
Chief Financial Officer David Mathers, 49, said on a call with journalists Tuesday that the capital ratio would improve along with the leverage ratio, a measure regulators are increasingly focusing on and which increased to 2.6 percent from 2.4 percent. Capital was hurt in the quarter by the company’s share purchases for employee awards, he said.
Most of the stock purchases to compensate employees take place in the first half and the effect evens out over the year as shares are handed out to employees, Mathers said.
The capital ratio is a “catastrophe,” said Dirk Becker, an analyst at Kepler Cheuvreux in Frankfurt. “It’s easy for the new CEO to say that he sees this differently and raise capital.”
The investment bank posted a 1.2 percent decrease in pretax profit of the businesses it’s keeping to 1.12 billion francs as costs rose more than sales. While trading revenue was higher than last year, the bank conceded a “slowdown in underwriting and advisory, where we had a difficult start to the year.”
Revenue from underwriting and advisory declined 26 percent to 617 million francs. The bank pointed to lower leveraged-finance underwriting activity and fewer initial public offerings. Still, Credit Suisse was the only firm among large investment banks that published results this month that saw declining sales from advisory, data compiled by Bloomberg show.
Fixed-income trading revenue rose 9.2 percent to 1.73 billion francs, while equities gained 11 percent to 1.34 billion francs.
“Looking at the second quarter to date, the momentum in the businesses has carried over from the first quarter, with an improving trend in underwriting and advisory,” Dougan, 55, said in the statement.
Private banking and wealth management earned 834 million francs in pretax profit, down 18 percent. Wealth-management client business, the biggest part of the division, posted pretax profit of 636 million francs, up 10 percent, and beat analysts’ estimates as the ratio of costs to revenues declined. Net margin at the wealth management clients unit was 30 basis points, the highest since the second quarter of 2013.
Credit Suisse benefited from the same surge in trading that helped lift earnings at U.S. competitors, though higher costs at the investment bank eroded profit. The bank Tuesday also reduced its cost-cutting target for this year, citing risk, compliance and regulatory charges.
The bank posted “better performance in wealth management both in terms of margins and costs as well as strength in trading,” said Jon Peace, a London-based analyst at Nomura Holdings Inc. “Overall results are slightly mixed because of the backward evolution in capital.”
Financial markets have been energized by expectations the U.S. Federal Reserve will raise rates later this year and by the European Central Bank’s asset-buying program. The Swiss National Bank’s decision in January to lift its cap on the franc also roiled markets.
Credit Suisse said the cost reductions it announced to counter fallout from the SNB’s decision “successfully mitigated the impact.”
The bank lowered its cost-cutting target to 4 billion francs to 4.25 billion francs, from 4.5 billion francs, it said Tuesday.
Credit Suisse is the first among Europe’s biggest lenders to report first-quarter earnings.
Dougan said the bank will be able to generate enough earnings to boost capital ratios over time.
“I still believe we have a very capital-generative model overall,” he said in an interview with Bloomberg television. “We will generate a lot of capital over time. So I think that that organic generation is sufficient to get us where we need to get to.”