ZURICH Credit Suisse Group AG will quit commodities trading after chalking up its biggest loss since the financial crisis in 2008, the result of a 1.6 billion Swiss franc ($1.78 billion) fine from U.S. authorities for helping its clients evade taxes.
The Swiss bank reversed a recent vow to stick with its commodities unit, and thus joins the ranks of trading firms answering regulatory demands for more capital by significantly reducing or even shuttering their natural resource trading arms.
Credit Suisse's fixed income unit outshone both its wealthy client unit and its U.S. rivals with a 4 percent rise in sales and trading, flouting its own downbeat guidance in May. That compares to drops of at least 10 percent at American banks like Goldman Sachs and JPMorgan last week.
Credit Suisse said the commodities cuts, set to save $75 million, would allow resources and funds to be reassigned to its private bank, which disappointed investors with a 39 percent drop in revenue and weaker margins, and swung to a loss due to the fine.
"I want to reiterate that we deeply regret the past misconduct that led to this settlement and that we take full responsibility for it," Brady Dougan, chief executive of the Zurich-based lender, said on Tuesday.
Credit Suisse's private bank has been under scrutiny since the bank's guilty plea to the U.S. criminal charge, with investors worried about clients pulling money out of its wealth management business as a result.
"It's hard to exactly estimate the impact but it certainly did have an impact," Dougan told a news conference.
"There may have been clients who didn't do business with us who otherwise would have," he said.
The private bank, measured by its ability to win fresh funds from new and existing clients, saw a "hiatus of inflows" between the end of April and May 19, when the settlement was publicly disclosed, according to executives.
However, the unit ultimately netted 10.1 billion francs of net new money in the quarter, a key indicator of future revenue - and just above analysts' consensus for 9.27 billion francs.
Dougan said the bank's capabilities to offer services to clients - another major concern of investors - were not hampered as a result of the settlement.
"The guilty plea in the U.S. appears to have had no negative impact on business and... we believe the shares remain attractively priced," Nomura analyst Jon Peace said. He rates the stock at buy with a 36 franc target price.
Pretax profit at Credit Suisse's investment bank, where it cut back underperforming areas like its interest rate trading arm, was near unchanged on the year at 752 million francs.
But the investment bank result failed to underpin the bank's shares. At 1155 GMT, the stock was down 1.3 percent against a 1.7 percent rise in the European sector. Traders cited feebleness at the private bank and weak capital ratios as reasons for the underperformance.
The bank said it would wind down its commodities trading, where it is mid-sized player, joining the likes of investment banks like Deutsche Bank, JPMorgan and Barclays that are either exiting or significantly downsizing their activities in commodities.
Credit Suisse's exit leaves only a small number of players in commodities trading, which had been seen as the absolute necessity of investment banking only a few years ago, including Goldman Sachs, Citigroup, Morgan Stanley and some new comers such as BTG Pactual.
In past years, Credit Suisse's revenue from commodities was very volatile, sometime exceeding $200 million and sometimes barely above $10 million.
The bank didn't elaborate on how many staff would leave the bank as a result of the dismantling, which doesn't affect a Geneva-based commodities and trade finance unit.
The overall investment bank, which cut 500 jobs on the quarter, will continue to trade precious metals, which typically are traded alongside foreign currencies.
It will also move forex trading, where it is not a major player, towards electronic trading and voice offering for larger and more complex trades, and will focus its rates business on cash products and derivatives.
The fixed income outperformance, on the back of activities such as mortgage servicing, helped it counter a drop in equity trading.
But the shifts in mix may not be enough to catch up to crosstown rival UBS, the largest private bank in the world, according to Espirito Santo Investment Bank.
"Overall, while the investment bank has outperformed this quarter, private banking and wealth management continues to disappoint," said Espirito's Shailesh Raikundlia.
"Given the focus on private banking to drive returns going forward, we continue to believe that UBS' private banking franchise offers higher returns potential than Credit Suisse's."
Credit Suisse wants to eventually return to double-digit capital returns from its core investment bank, including its equities and advisory divisions, following the overhaul.
The bank said on Tuesday it was on track to cut spending by 4.5 billion francs by the end of next year, having cut 3.4 billion. All the measures form part of a plan to begin paying out roughly half of profits once a key ratio, which stood at 9.5 percent in the quarter, reaches 10 percent.
Credit Suisse's finance chief told journalists the bank, which paid out 0.70 francs last year, had stowed funds for a cash payout for this year, but that the ultimate level would depend on second half business.
The bank swung to a second-quarter loss of 700 million francs, wider than a Reuters analyst poll which called for a 581 million franc net loss.
German lender Deutsche Bank and crosstown rival UBS both report the quarter next Tuesday.
($1 = 0.8979 Swiss Francs)
(Additional reporting by Oliver Hirt, Joshua Franklin and Ruppert Pretterklieber in Zurich, and Dmitry Zhdannikov in London; Editing by Sophie Walker)