TEXT-Fitch:Credit Suisse Q3 results ratings neutral
Oct 26 - Credit Suisse Group AG's ('A'/Stable/'F1'/'a') Q312 results were generally in line with Fitch's expectations that the group would generate satisfactory results while strengthening capitalisation further and maintaining sound liquidity. In Q312, Credit Suisse generated pre-tax profit excluding the impact from credit spread movements on own liabilities of CHF1.4bn, a 31% increase over adjusted Q212 pre-tax profit. Adjusting for other one-off items, which in Q312 included CHF522m gains from the sale of real estate assets and non-core businesses as well as business realignment costs, pre-tax income was 5% higher than in the previous quarter. These latest results have no rating implications.
The Q312 results confirmed Credit Suisse's progress in strengthening its capitalisation as the bank has finalised the bulk of its capital strengthening measures announced in July 2012. As a result, its end-Q312 'look-through' Basel III common equity tier 1 (CET1) ratio reached 7.5% and its Swiss core capital ratio, which includes legacy hybrid instruments, 8.2%. The bank expects to reach a look-through CET1 ratio of 8.5% by end-2012 and 11% by end-2013. This capital improvement was taken into account in Fitch's affirmation of Credit Suisse's ratings earlier in October 2012. Management has indicated that it intends to resume cash dividend payments once its target 10% Swiss core capital ratio has been reached. However, Fitch expects the bank to maintain strong capital ratios, and an additional CHF4.2bn of loss absorbing capital in the form of high-trigger contingent capital (CoCo) instruments are in place to absorb potential losses.
In addition, the bank announced plans to improve its balance sheet leverage. Credit Suisse expects to reduce its balance sheet by at least 12% to below CHF900bn by end-2013. It plans to achieve this mainly by reducing its large repo book and by reducing balance sheet utilisation in its prime services business and in its treasury operations. Together with the increase in core capital from the issue of the mandatory convertible note that will convert into shareholders' equity in March 2013, the balance sheet reduction will improve leverage to bring it closer to its main European competitors.
Having achieved its CHF2bn expense reduction target early, Credit Suisse reported further cost reduction targets. The bank identified an additional CHF2bn cost savings. While the initial cost reduction concentrated on the investment bank, where CHF1.4bn cost savings have been realised, the additional reductions are expected to be realised to a large extent from infrastructure cost savings in centralised functions.
Fitch believes that it will be important for the bank to reduce its cost base further given that reported operating expenses remain high in relation to revenue and regulatory and litigation provisions have increased. Credit Suisse's cost reduction target does not include costs related to achieve the expense reduction, which the bank expects to amount to about CHF1.2bn by 2015, or variable compensation expenses.
Investment banking generated CHF508m pre-tax income in Q312, a 33% quarter-on-quarter (qoq) improvement. Despite achieving its cost reduction target, operating expenses in investment banking remained high with a 9M12 cost/income ratio of 82%. Stronger pre-tax income was primarily driven by improved net revenues in fixed income sales and trading, which compensated for an 11% decline in equity sales and trading revenue. In equities, Credit Suisse saw solid performance in prime services, where it has a strong global franchise, while cash equities, where the bank has a solid global position, were affected by weaker trading volumes.
Fixed income trading benefited from a modest recovery in market conditions, which helped the performance in securitised products, credit and emerging markets. Revenue also reflected losses of about CHF800m related to Credit Suisse's fixed income wind-down portfolio, whose Basel III risk-weighted assets (RWA) had reduced to USD14bn at end-Q312 from USD57bn a year earlier. Across the whole fixed income portfolio, the bank has sharply reduced Basel III RWA since Q311 to USD131bn at end-September 2012 from USD230bn a year earlier.
Results in private banking, which includes wealth management and Credit Suisse's domestic retail and corporate banking activities, saw an 11% qoq decline in pre-tax income, mainly driven by a 4% decline in revenue as transaction-based revenue fell and the previous quarter had been boosted by seasonal performance fees. The bank continues to attract net new assets, which for the private bank amounted to CHF5.2bn in the quarter. Assets under management (AuM) reached CHF1,024bn at end-September, helped by market movements, but the bank's gross margin on wealth management clients fell somewhat to 107bp.
Fitch considers the more stable earnings from Credit Suisse's wealth management and domestic banking operations to be a positive ratings driver. Gross margins on AuM have been under pressure in recent quarters, which partly reflects the lower transaction volumes, but also the lower gross margin realised on ultra-high-net-worth individuals, whose relative contribution to overall profitability is, however, higher.
Asset management generated pre-tax income of CHF222m in the quarter, which included a CHF140m gain from the sale of Credit Suisse's stake in Aberdeen Asset Management offset by a CHF38m impairment of an equity participation. The asset management division had net asset outflows of CHF0.5bn in Q312, but total AuM increased and reached CHF369bn at end-September.
As part of its efforts to strengthen capitalisation, Credit Suisse in July 2012 announced plans to sell some private equity businesses in addition to the sale of its remaining stake in Aberdeen Asset Management, which was completed in Q312. The group now also plans to sell its exchange-traded funds business but announced that it had no additional plans to divest asset management operations.
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