* Extra legal provisions of 514 mln francs hit net profit
* Warns of losses from in-house bad bank
* Aims to ramp up shareholder returns
* Pretax profit dips at private bank
* Bank says on track to meet spending cut target
By Katharina Bart
ZURICH, Feb 6 Credit Suisse showed on Thursday that an overhaul of its investment bank will take time to pay off after reporting flat fourth-quarter net profits that missed forecasts due to higher legal costs in the United States.
The bank is cutting back on riskier business areas in the wake of the financial crisis and tougher regulation. But - as with many rivals - litigation headaches continue to swirl around Switzerland's second-largest bank.
Chief Executive Brady Dougan has pledged the overhaul will enable the group to meet a return on equity target of 15 percent, from 2.5 percent currently, but in the short-term the changes are hitting the bottom line.
Dougan said shrinking the non-core parts of the business, such as its interest rate trading arm, would eventually allow the double-digit capital returns from its core investment bank, including its equities and advisory divisions, to shine through.
"The quicker we can get the non-strategic piece down and focus on optimising and growing the strategic part of the business, 19 percent I think is a good if not best in class return in that business," he told analysts.
The bank also shrank its pay bill by 8 percent in 2013 including a 10 percent drop at the investment bank. Crosstown rival UBS was criticised on Tuesday for increasing its bonus pool by 28 percent to 3.2 billion francs.
Credit Suisse has not yet made its bonus pool public.
Robust results from UBS on Tuesday vindicated that bank's decision to revamp its investment bank and largely withdraw from riskier activities in fixed income where a slowdown has hurt rivals such as Goldman Sachs and Deutsche Bank.
Analysts said Credit Suisse was playing catch-up.
"You are just starting on a road of restructuring that UBS started 12-24 months earlier," Alex Potter, analyst at Geneva-based private bank Mirabaud, said. "I like a good restructuring story so I am positive on the company but there is not enough here to convince the market of that view."
Credit Suisse's fourth-quarter net profit of 267 million Swiss francs ($295.58 million) was up from 263 million a year earlier, after taking a 339 million franc provision for mortgage litigation at its investment bank and 175 million francs for a U.S. probe into hidden offshore accounts in Switzerland.
Analysts had on average forecast fourth-quarter net profit of 448 million francs.
For the full year, net profit more than doubled to 3.07 billion francs, as charges on the bank's own debt that weighed on last year's result fell away.
The investment bank had a pretax loss of 40 million francs. Similar to rivals, its interest rates business suffered from a sharp drop in activity, while equities, credit and underwriting securities were healthier.
Credit Suisse shares were down 0.7 percent after an earlier fall of nearly 3 percent.
The stock is trading at around 9.7 times forward earnings, well below UBS's 14.7 times valuation and smaller private bank Julius Baer's 15, according to Thomson Reuters data.
GHOSTS OF THE PAST
Credit Suisse, along with other banks, is still shelling out huge sums of money nearly six years after the global financial crisis for a range of scandals.
The bank set aside more than 1 billion francs last year to deal with its legal problems. It also agreed to add 6.9 billion francs to its risk-weighed assets after talks with the Swiss regulator over legal fees and risks such as rogue traders.
Deutsche Bank last month blamed litigation costs for a 1 billion euro loss in the fourth quarter.
"They are definitely haunted by the past," Rainer Skierka, analyst with private bank J. Safra Sarasin in Zurich, said.
As tougher regulation and volatile markets dent investment banking returns, Credit Suisse is leaning more heavily on its private banking franchise, which is the fifth-largest in the world by assets. But this business is dealing with fallout from a probe by U.S. authorities into whether it helped wealthy U.S. clients avoid taxes.
Tax amnesties and crackdowns in Europe are also hurting. Chief Financial Officer David Mathers told analysts the bank had already lost over 35 billion francs in outflows from western Europe, as clients pull out. He said he expected to lose 6-10 billion francs this year, with the final figure likely to be close to the top of that range.
Along with other Swiss private banks, which have also suffered outflows, Credit Suisse is compensating by attracting funds from wealthy customers in Asia.
Overall in 2013, its private bank pulled in 4.4 billion francs in new funds, short of forecasts for 5.27 billion francs, mainly from the ultra-rich and from emerging markets.
The private bank's pretax profit slipped to 870 million francs, from 911 million francs a year ago due to the provision for the tax probe, which Credit Suisse is trying to settle.
Rival UBS paid $780 million and handed over thousands of files on clients to settle its U.S. tax probe in 2009.