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RPT-Fitch: Credit Suisse 1Q14 performance dampened by weaker fixed income earnings
April 17, 2014 / 9:06 AM / 3 years ago

RPT-Fitch: Credit Suisse 1Q14 performance dampened by weaker fixed income earnings

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April 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that Credit Suisse Group AG's (Credit Suisse, A/Stable/a) 1Q14 results reflect pressure on fixed income earnings in the sector and highlight the importance of the group's strong wealth management franchise and its cost reduction efforts. The results have no immediate effect on Credit Suisse's ratings.

Credit Suisse reported CHF1.5bn 1Q14 pre-tax profit adjusted for non-controlling interests without significant economic interest and CHF120m negative movements in its own credit spreads. The 19% yoy decline in adjusted pre-tax profit was largely driven by a 36% drop in the investment bank's pre-tax profit, while the private banking and wealth management saw a 15% rise.

The group's reported net return on equity, excluding movements in its own credit spreads, dropped to 9% in 1Q14 from 15% in 1Q13. We believe that the earnings drop in what is seasonally the strongest quarter means that it will be challenging for the bank to generate strong profitability in its investment bank for the rest of FY14.

The investment bank reported CHF827m pre-tax profit after a CHF564m loss in 4Q13 but this was 36% lower than in 1Q13. The main driver for the yoy decline was weaker net revenue in fixed income trading, which dropped 22% yoy in USD-terms, broadly in line with those of the bank's US peers that have reported 1Q14 results to date. Fixed income sales and trading suffered from a weaker market environment, particularly in the group's emerging markets operations and in macro rates.

Equity sales and trading, which generated about 45% of sales and trading net revenue, remained more resilient but still declined by 7% yoy (up 14% qoq) as cash equities saw weaker performance. Underwriting and advisory net revenue improved 9% yoy but declined qoq as underwriting volumes in the industry were lower.

Non-strategic businesses in the investment bank continued to weigh on performance as they generated a CHF297m pre-tax loss in 1Q14. We expect these businesses to continue to be a drag on earnings and to be volatile, but the bank has made further progress in reducing its non-strategic investment banking assets, which at end-March 2014 amounted to USD79bn in Basel III leverage exposure, USD8bn lower than at end-2013.

Private banking and wealth management saw solid performance with pre-tax profit of CHF1bn (up 15% yoy) as pressure on net interest income was mitigated by higher transaction and performance-based fees and recurring commissions. Operating expenses fell 7% yoy, which underpinned pre-tax profit, and we expect the business to remain a strong performer given the bank's global franchise and plans to reduce operating expenses further.

Net new assets inflows in private banking and wealth management were strong at CHF13.7bn, of which CHF10.6bn were from wealth management clients, and CHF7bn from asset management. The division saw further net asset outflows of CHF2.1bn from its western European cross-border business. Assets under management remained broadly stable at CHF1,292bn as business disposals and foreign exchange movements partially offset net new money inflows and positive market movements. Credit Suisse's gross margin remained stable at 104bp, but the decline in operating costs and growth resulted in a 6bp improvement in the net margin to 29bp in the quarter.

Credit Suisse's capital ratios based on risk-weighted assets (RWA) are well within its peer group range with a fully-applied Basel III common equity Tier 1 (CET1) ratio broadly stable at 10%. Methodology changes increased RWA by CHF14bn in 1Q14, including a CHF5.3bn increase in operational risk RWA following a revision of the bank's internal model and increased capital requirements for securitised assets in the trading book.

The increase in RWA is material and would have had a 100bp negative impact on the bank's phased-in CET1 ratio were it not mitigated by reduced risk exposure and increased capital. Credit Suisse targets an 11% Basel III CET1 ratio on a fully-applied basis, which should give management a buffer above the regulatory minimum requirement of 10% to manage volatility in the CET1 ratio. Volatility could arise from changes to model-driven RWA or from future changes in regulatory requirements.

Credit Suisse's leverage ratio has also improved, and the group reported a 3.2% Basel III Tier 1 leverage ratio at end-March 2014. This remains below leverage ratios reported by the bank's US peers, but we expect leverage to improve further as the bank plans to reduce leverage exposure by CHF140bn to around CHF1,000bn in the long term. Its Basel III Tier 1 leverage ratio benefits from the sizeable amount of Basel III additional Tier 1 capital that the bank has issued. Credit Suisse also plans to complete its contingent capital issue plan in 2014 by issuing a further CHF2bn of low-trigger contingent capital instruments.

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