Credit Suisse writedowns hit investment bank
ZURICH (Reuters) - Credit Suisse (CSGN.VX) said third-quarter profit at its investment bank was all but wiped out by writedowns, leading to a 31 percent fall in group net earnings to 1.3 billion Swiss francs ($1.12 billion).
Investment banking income was hit by writedowns of over 2.2 billion Swiss francs ($1.9 billion) in leveraged loan commitments, residential mortgages and collateralized debt obligations. The division barely broke even.
The results, boosted at group level by a tax credit and revaluations of bond holdings, sent the bank's share price lower.
Credit Suisse's shares were 2.95 percent down at 5:40 a.m. EDT, when the DJ Stoxx European banking sector index .SX7P was down 1.59 percent.
Banks worldwide have taken charges totaling more than $20 billion on holdings in mortgage-backed securities which have been hit by rising defaults in U.S. subprime mortgages -- loans extended to borrowers with patchy credit histories.
"The extreme market conditions that characterized the third quarter affected many of our businesses," Chief Executive Brady Dougan said in a statement on Thursday.
"It is too early to predict when all of the affected markets will return to normal levels," he added.
Credit Suisse, which said it had started unwinding its exposure to subprime mortgages late last year, has emerged less damaged by the subprime market meltdown than many of its peers.
Earlier this week CS's rival UBS (UBSN.VX) reported a wider than expected third-quarter loss, and warned of more writedowns in the fourth quarter. Last week Merrill Lynch MER.N reported an unexpected $8.4 billion in writedowns.
In a sign that market uncertainties were taking a toll on staff rewards, Credit Suisse said its compensation and benefits bill fell to 2.392 billion francs in the third quarter from 5.409 billion in the second three-month period of 2007.
But analysts said they were slightly disappointed that Credit Suisse had only just broken even in investment banking and fared slightly worse than expected in private banking.
"They made 1.3 billion francs (net profit) but the quality is weaker than I thought," said Andreas Venditti at ZKB. He said Credit Suisse benefited from 622 million francs in valuation gains on its own debt and a tax credit of 315 million francs.
Others pointed to weaker inflows of money into Credit Suisse's wealth management unit compared with UBS.
"The market may be a bit disappointed," said David Williams at Fox Pitt-Kelton. "Clearly, break-even is a whole lot better than UBS which had a big loss in investment banking, but UBS had a fantastic number for net new money (in wealth management)".
Williams said he had expected the investment bank division to make a profit of at least 300 million francs.
Chief Financial Officer Renato Fassbind left open the possibility of Credit Suisse having to make further valuation changes, which may include writedowns to its credit markets exposure, cautioning that "fair value accounting is subject to market developments."
He also declined to say how large the bank's exposure was to CDOs -- repackaged mortgage-backed loans -- which have proved a major source of woes for its local rival UBS.
"We are not disclosing a number for those (CDOs) but they are minimal compared to some of our peers, so we're pretty comfortable," he told CNBC television. UBS earlier this week reported $1.8 billion in exposures to CDOs.
Net new money in wealth management was 9.7 billion Swiss francs, the Swiss bank said, down from 10.9 billion francs in the third quarter of 2006 and compared with an average forecast by analysts of 10.7 billion francs. The annualized gain in net new money inflows in the third quarter was 4.5 percent, below a target of 6 percent, said ZKB's Venditti.
UBS reported net money inflows into its wealth management business of 40.2 billion francs in the third quarter.
But Credit Suisse as a group, which includes its very large asset management division, reported an outflow of 9.7 billion francs. The Swiss bank had said at the beginning of October it expected its third-quarter net profit to fall within a range of plus or minus 20 percent of 1.30 billion francs.
The average forecast given in a Reuters poll of 14 analysts was for a net profit of 1.268 billion francs.
Credit Suisse's other major European rival, Deutsche Bank (DBKGn.DE), heartened investors on Wednesday when it reported a higher than expected quarterly group profit even though its investment bank, the driving force behind the bank's recent expansion, lost money.
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