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Banks

Credit Suisse profit surprise bolsters Thiam's turnaround

ZURICH (Reuters) - Credit Suisse CSGN.S posted an unexpected second-quarter net profit on Thursday, boosting Chief Executive Tidjane Thiam's efforts to restructure Switzerland's second-biggest bank.

CEO Tidjane Thiam (R) of Swiss bank Credit Suisse awaits a news conference to present the bank's halfyear results in Zurich, Switzerland July 28, 2016. REUTERS/Arnd Wiegmann/File Photo

The results confounded expectations for a third straight quarterly loss and offered the first green shoots for Thiam’s wealth-management driven strategy, which has been hampered by tough financial markets, muddled communication and concerns over Credit Suisse’s capital position.

At 170 million Swiss francs ($173.5 million), net profit was well down on the 1.05 billion earned in the same period last year. But it beat even the most optimistic forecast in a Reuters poll of six analysts, with the average estimate for a 192 million franc loss.

“This is clearly better than feared,” Kepler Cheuvreux analyst Peter Casanova, who has a “hold” rating on the stock, wrote in a note.

Despite the earnings beat, Thiam struck a cautious tone, which was also reflected in the share price reaction.

“I never want to declare victory after two quarters,” he told a news conference. “All we’re saying here today is that things are moving in the right direction.”

His blueprint is to move away from volatile, capital-intensive investment banking and focus on wealth management, which offers more stable returns. Thiam is also looking to cut at least 4.3 billion francs in costs by the end of 2018.

Credit Suisse shares pared early gains to trade down 4.3 percent by 1315 GMT, a steeper drop than the sector .SX7P.

With quarterly net revenues down 26.6 percent, questions also still linger over the bank’s capital position, where it trails some peers, and potential fines from litigation risks.

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Credit Suisse boosted its common equity Tier 1 capital ratio - a key measure of capital strength - by 40 basis points to 11.8 percent by cutting back on risk-weighted assets. This is within its target of 11 to 12 percent for 2016 but still not enough to convince some analysts.

“We believe CS will still need to raise another round of capital next year,” Bernstein analysts, who rate the stock “underperform”, wrote.

The question remains even after a 6 billion franc capital raising last year and plans to float part of its Swiss business, which the bank hopes will raise 2 billion to 4 billion francs.

Thiam said it has an adequate capital position.

“A LOT OF UPSIDE”

Record-low interest rates, rocky financial markets and restrained client activity are making it difficult for many major European banks to find top-line growth.

With shrinking revenues, a key focus will be on the progress of cost-cutting measures, including thousands of layoffs, with Credit Suisse saying it was on track to hit 2016 savings target.

“Reducing cost is a clear and absolute priority for us,” Thiam said, adding there is “a lot of upside” should markets improve.

Second-quarter earnings were boosted by unexpected pre-tax income of 154 million francs at Credit Suisse’s global markets division, one of two investment banking divisions and a source of steep losses in recent months.

It benefited from moving assets into the bank’s strategic resolution unit, which winds down activities it no longer wants.

With Thiam hoping private banking will be Credit Suisse’s main money maker in the years ahead, analysts welcomed “strong” net new money inflows of 11.3 billion francs at its three private banking divisions.

PANAMA LINK

Britain’s June 23 vote to leave the European Union caught many in the market off guard, but Thiam said a decision to cut back on risky positions had prevented any large losses.

Credit Suisse also said it was cooperating with governmental and regulatory authorities over banking relationships between financial institutions, clients and the Panama-based law firm of Mossack Fonseca.

Leaks from the law firm, dubbed the “Panama Papers,” have embarrassed several world leaders and shone a spotlight on the shadowy world of offshore companies.

Credit Suisse said it was conducting a review of the issues.

Editing by David Holmes and Alexander Smith

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