ZURICH Credit Suisse CSGN.VX warned on Thursday it could report its first quarterly loss in five years, further eroding the bank's credibility with investors still shaken by February's $2.85 billion trading scandal.
The bank's shares dropped more than 11 percent after it said unprecedented market conditions in March -- with wild swings in prices for stock and debt and emergency interventions by major central banks -- had introduced new uncertainty and made unlikely any profit for the period.
"This is clearly embarrassing for Credit Suisse and further damages the reputation that it had worked so hard to improve after years of reckless risk taking. Whilst we suspect that the bank has less suspect assets than UBS, our confidence in this view has diminished considerably as a result of these recent announcements," said Helvea analyst Peter Thorne.
Brady Dougan, the American chief executive of the Swiss-based group, said an extended investigation had revealed no new valuation flaws since he was forced to reveal in February that CS traders had deliberately mispriced CDO debt derivatives.
"We're operating in extremely volatile markets. The stress on the industry is evident," Dougan said in a conference call.
A loss in the first quarter of 2008 would be its first quarterly loss since the second quarter of 2003.
CS shares fell 10 percent to 46.40 Swiss francs by 1248 GMT, having hit 46.10. Credit Suisse shares have shed 50 percent since May last year.
Before the scandal, which the bank said involved a handful of derivatives traders, Credit Suisse had largely escaped the subprime crisis and stood in sharp contrast to arch-rival UBS AG UBSN.VX, Europe's hardest-hit bank.
But in February, the bank shocked markets by writing down $2.85 billion in asset-backed investments and suspending some traders after finding pricing errors on its books.
On Thursday, Credit Suisse reduced that amount by 200 million Swiss francs ($201.4 million) to 2.86 billion francs.
But doubts still nag about whether the bank can escape the credit crisis with merely a dent to its reputation from poorly behaved traders.
The bank, while avoiding massive writedowns from the most toxic forms of subprime debt, last reported large exposures to instruments that investors increasingly deem at-risk. Those include 36 billion francs in leveraged finance investments and 26 billion francs on commercial real estate securities.
"The main reason for the group not being profitable in 1Q 08 and the negative impact in March will be due to mark-downs on these positions as well as potentially weaker prop trading," said analysts at J.P. Morgan in a note.
Only last month, CS said it expected to post a profit for the first quarter and estimated that the writedowns would wipe $1 billion from its net income, after taking into account tax credits and cancelling some staff bonuses.
Credit Suisse now said it would post a writedown of 1.18 billion francs against its 2007 accounts -- which translated into a hit of 789 million francs net of tax -- and of 1.68 billion francs against its first quarter 2008 accounts.
The writedowns are the latest in a string of shocks from global banks, including huge new subprime-related exposures at rival UBS and the emergency takeover of U.S. investment bank Bear Stearns BSC.N by rival J.P. Morgan (JPM.N).
Bank shares staged a brief rebound this week after results from some U.S. investment banks for the three-month period ending in February came in better than expected. The DJ Stoxx European bank sector .SX7P fell 1.5 percent in the wake of the Credit Suisse news.
"This is a good example of how the results from U.S. investment banks in the past several days is not an all-clear signal for the financial sector because it only covers the December-to-February period," said analysts at bank ZKB.
(Additional reporting by Peter Maushagen, Albert Schmieder and Douwe Miedema; Editing by Louise Ireland)