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Fitch: Credit Suisse 2Q14 Results Show Small Loss Due to US Fine
July 23, 2014 / 1:35 PM / in 3 years

Fitch: Credit Suisse 2Q14 Results Show Small Loss Due to US Fine

(The following statement was released by the rating agency) LONDON, July 23 (Fitch) Fitch Ratings says that although Credit Suisse Group AG's (Credit Suisse, A/Stable/a) 2Q14 results were dented by the large US settlement fine, the performance of the group's strategic businesses remained resilient. The results also highlighted the importance of further cost reductions and the potential volatility of the bank's fixed income sales and trading revenue. The results have no immediate effect on Credit Suisse's ratings. Credit Suisse reported a CHF0.4bn 2Q14 pre-tax loss - adjusted for non-controlling interests without significant economic interest and CHF10m negative movements in its own credit spreads. The loss was largely a result of a settlement with the US authorities into the assistance provided to US persons to evade or avoid paying tax, which had a pre-tax impact of CHF1.6bn in 2Q14. The impact of the settlement was significant, but resolves an issue that had been weighing on the bank and taking up management time and attention for a number of years. The investigation had been on-going since 2011. The bank announced its exit from US resident cross-border business in 2008. In line with its global peers, Credit Suisse remains exposed to litigation and regulatory risks. The group announced that it did not expect the on-going investigations into foreign exchange rate setting to have a material effect, and management considers its exposure to conduct risks related to benchmark rate setting to be limited. Nonetheless, Credit Suisse's remaining exposure to litigation includes exposure to some mortgage-related cases in the US. Excluding the large fine, Credit Suisse would have reported CHF1.3bn 2Q14 in pre-tax profit (adjusted for non-controlling interests without significant economic interest and movements in its own credit spreads), a 10% yoy decline in adjusted pre-tax profit, which translates into an adjusted pre-tax return on equity of 12% in 2Q14. The investment bank's pre-tax profit was stable, but private banking and wealth management saw a 5% decline in pre-tax profit excluding the settlement fine. In addition, there was a yoy increase in the corporate centre loss, partly due to business realignment and IT costs. The investment bank reported CHF752m pre-tax profit, which was stable compared with CHF754m in 2Q13, but 9% lower than a seasonally strong 1Q14. Weak trading performance in the first half of the quarter was highlighted in an announcement by the bank in mid-May 2014, when it reported that trading revenue had fallen. However, improvement in performance later in the quarter resulted in a 5% increase yoy (in US dollar terms) in trading revenue for the whole of 2Q14. The main driver for the yoy stability in the investment bank was solid net revenue in fixed income sales and trading in the group's strategic businesses, which increased 4% yoy (11% in US dollar terms). The performance of the bank's fixed income trading in areas it determines as strategic was far better than at its US peers, which have generally seen yoy declines in fixed income trading. The relative resilience reflects the exclusion of non-strategic businesses, which generated negative net revenue in 2Q14, and the bank's strong franchises in securitised products, credit and emerging markets. Credit Suisse has a clear focus on its strategic businesses in fixed income and transferred a large part of its rates business to its non-strategic portfolio. The bank announced that it was exiting its commodities trading business and would concentrate on moving an increasing portion of foreign exchange trading to electronic platforms. The increase in fixed income sales and trading revenue was able to offset a 10% yoy decline (in US dollar terms) in revenue from equity sales and trading, which generated about 45% of total sales and trading net revenue. The decline in equity sales and trading revenue came from the continued weak performance of cash equities and a significant decline in derivatives. Underwriting and advisory net revenue improved 10% qoq (flat yoy) as equity underwriting volumes were higher. Non-strategic businesses in the investment bank continued to weigh on performance as they generated a CHF282m pre-tax loss in 2Q14. Fitch expects these businesses to continue to be a drag on earnings and volatile, but the bank has made further progress in reducing its non-strategic investment banking assets, which at end-June 2014 amounted to USD72bn in Basel III leverage exposure, slightly (USD3bn) lower than at end-1Q14. The performance of private banking and wealth management was weaker, with pre-tax profit of CHF0.9bn (excluding the CHF1.6bn impact of the settlement) given pressure on net interest income, transaction and performance-based fees and recurring commissions. The decline in revenue was partly offset by a reduction in operating expenses, excluding the impact of the settlement, of 12% yoy. 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 the bank's strategic private banking and wealth management activities were strong at CHF11.8bn, of which CHF7.4bn was from wealth management clients, and CHF4.1bn from asset management, despite further net asset outflows of CHF2.9bn from its western European cross-border business. This contributed to the slight increase (3% yoy) in total assets under management (AuM) of CHF1,330bn. Credit Suisse's gross AuM margin declined to 99bp as transaction volumes remained low and the net interest margin remains under pressure, but the reduction in operating costs resulted in a 1bp improvement in the net AuM margin to 28bp in the quarter. The quarterly loss led to a 50bp decline in Credit Suisse's fully applied Basel III pro-forma common equity Tier 1 (CET1) ratio to 9.5% at end 2Q14, which is at the lower end of its global trading and universal banks peer group. The bank is taking action to restore its fully loaded CET1 ratio to at least 10% by end-2014 by reducing risk-weighted assets and has reconfirmed its 11% long-term target. We expect the bank to reach its target and to maintain capital ratios in line with peers. The group's capital structure will continue to evolve as Credit Suisse announced that it will issue bail-in debt from its holding company. At the same time, the group will establish a separate subsidiary for its domestically systemically important businesses and will have to comply with increased local capital requirements outside Switzerland, mainly in the US and UK. Credit Suisse's leverage has remained stable despite the loss, and the group reported a 3.2% Basel III Tier 1 leverage ratio at end-June 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 CHF156bn 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. Contact: Alain Branchey Senior Director +33 1 44 29 91 41 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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