UPDATE 3-Investment bank outlook weighs on Credit Suisse
* Q2 net profit up by a third vs year ago
* Investment banking activity fell back in June due to Fed
* Charge for UK tax deal hits profits at private bank
* Stock biggest faller on European bank index (Releads with shares, adds analyst comment, CEO comment on Germany, updates shares)
By Katharina Bart
ZURICH, July 25 (Reuters) - Credit Suisse's investment bank drove a one-third jump in quarterly group profit, prompting investors to worry that a heavy reliance on fixed-income trading could hurt the lender if interest rates rise.
Like Wall Street rivals including Goldman Sachs and JP Morgan, Credit Suisse benefited from strong trading in stocks and bonds in the second quarter, more than doubling pretax investment bank profit from a year ago.
But investors' expectations that the U.S. Federal Reserve may start increasing interest rates next year rattled financial markets in June and early July, putting banks' clients off issuing debt.
Credit Suisse said on Thursday its major markets appeared to be stabilising, but failed to convince investors who sent its shares down more than 3 percent.
"Rising long-term rates will hit Credit Suisse where it has traditionally been strong, such as in high-yield bond trading or leveraged finance," Mediobanca analyst Chris Wheeler said.
Compared with the previous quarter, typically the strongest period for capital markets, pretax profit at the investment bank was down 42 percent, with fixed-income revenues the worst hit.
Credit Suisse Chief Executive Brady Dougan said higher interest rates would eventually benefit profit margins, particularly at its other division, the private bank which has been hurt by a global crackdown on Swiss bank secrecy.
Higher rates will allow the private bank to earn more on deposits and loans.
But investors are concerned that rising rates will hurt the bank's lucrative bond trading before they help the private bank.
With muted revenue at that division, Credit Suisse relied on its investment bank to lift second-quarter group net profit to 1.05 billion Swiss francs, a touch above the 1.02 billion francs forecast by analysts in a Reuters poll.
Credit Suisse shares, which have climbed 13 percent in the last three weeks on expectations of a strong investment banking performance, were down 3.2 percent at 1448 GMT, the biggest faller among European banks.
Domestic rival UBS on Monday disclosed a profit for the quarter that will beat estimates, even after charges to settle a lawsuit with the U.S. housing regulator over the mis-selling of mortgage-backed bonds.
Both banks have cut risk and raised capital to meet stricter rules spawned by the global financial crisis, but Credit Suisse is sticking with its investment bank while UBS is abandoning riskier fixed-income activities.
UBS will report a full set of second-quarter results on Tuesday.
Credit Suisse's core capital ratio, a measure of financial strength, rose to 10.4 percent in the quarter, past a 10 percent target, which analysts said signaled higher payouts to shareholders.
Pretax profit at Credit Suisse's private banking and wealth management division fell 6 percent from a year ago after the Zurich-based lender took a 100 million franc charge to cover a Swiss-UK deal which requires banks to collect taxes on accounts of UK citizens.
Net revenue rose 1 percent on the year and 4 percent on the quarter, lagging large U.S. rivals such as Morgan Stanley.
But the private bank's net new money, a bellwether for future revenue, rose 3.6 percent to 7.5 billion francs, as strong inflows from emerging markets and super-rich clients, who have more than $50 million in bankable assets, compensated for outflows from Europe.
Credit Suisse is among a dozen Swiss banks under investigation by U.S. prosecutors for helping wealthy Americans evade tax and is negotiating to settle the allegations.
The bank, which made a 295 million franc provision towards a settlement in 2011, said it was preparing information on client withdrawals demanded by U.S. investigators to help pinpoint tax evasion.
While rival private bank Julius Baer said on Monday it hoped to make progress towards a U.S. settlement later this year, Credit Suisse was more cautious.
"We would welcome and actively seek to achieve it, but we cannot necessarily make a forecast that it can be achieved in the second half of this year," finance chief David Mathers said.
Credit Suisse confirmed it was looking at options for its private bank in Germany but won't pull out of the country, following reports last month it could sell parts of the business to improve profit.
($1 = 0.9352 Swiss francs) (Writing by Carmel Crimmins; Editing by Erica Billingham)
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