ZURICH Credit Suisse's CSGN.VX investment bank drove a one-third jump in second-quarter group earnings, while higher interest rates should help future profits at its private bank, the lender said.
The Zurich-based bank's normally stable wealth management arm has been rattled by a global crackdown on Swiss bank secrecy with European clients withdrawing money to avoid being snared by tax-evasion probes.
For the second straight quarter, Credit Suisse's more risky investment bank lifted group net profit, which rose to 1.05 billion Swiss francs, a touch above the 1.02 billion francs forecast by analysts in a Reuters poll.
Like Wall Street rivals including Goldman Sachs (GS.N) and JP Morgan (JPM.N), Credit Suisse benefited from strong trading in stocks and bonds, more than doubling pretax investment bank profit from a year ago. Compared with the previous quarter, typically the strongest period for capital markets, pretax profit was down 42 percent.
Credit Suisse shares, which have climbed 13 percent in the last three weeks on expectations of a strong investment banking performance, dropped over 2 percent to around 27.8 francs in early trade, underperforming the European banking index .SX7P.
A spike in bond yields in June, sparked by fears the U.S. Federal Reserve would cut back its quantitative easing efforts, put clients off issuing debt and equity. But Credit Suisse said it has seen recent signs of its major markets stabilizing, and an expected rise in interest rates should help profit margins.
"In the longer term, the transition to higher rates will benefit our business," Chief Executive Brady Dougan said in a statement.
Domestic rival UBS UBSN.VX 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 the fixed-income activities that soak up costly capital, cutting 10,000 jobs in the process.
UBS will report a full set of second-quarter results on Tuesday, along with other major European banks, Barclays (BARC.L), Deutsche (DBKGn.DE) and Santander (SAN.MC).
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.
"This is impressive in our view and raises the prospect of an increased dividend per share from the 0.75 francs that was awarded in 2012," Banco Espirito analyst Andrew Lim said.
Credit Suisse paid the dividend largely in stock last year, but promised investors it would go back to cash when it met its capital targets.
Pretax profit at Credit Suisse's private banking and wealth management division rose 4 percent on the quarter and fell 6 percent year on the year, after the Zurich-based lender took a 100 million franc charge to cover a deal between the British and Swiss governments aimed at sweeping Swiss banks clean of undeclared money held in accounts of UK clients.
Net revenue rose 1 percent on the year and 4 percent on the quarter, lagging large U.S. rivals such as Morgan Stanley.
The private bank's net new money, a bellwether for future revenue, rose by 3.6 percent on an annualized basis from the previous quarter 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.
Gross margins at Credit Suisse's private bank rose by 2 basis points on the quarter, reflecting greater trading activity by clients.
Credit Suisse is among a dozen Swiss banks under investigation by U.S. prosecutors for helping wealthy Americans evade tax and is negotiating with officials to settle the allegations, with the Swiss government's help.
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 BAER.VX said on Monday it hoped to make progress towards a settlement with the United States in the second half, 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.
($1 = 0.9352 Swiss francs)
(Writing by Carmel Crimmins; Editing by Erica Billingham)