Credit Suisse Posts Strong Q2 Earnings - Analyst Blog
Credit Suisse Group ( CS ) reported second-quarter 2013 adjusted net income attributable to shareholders of CHF 1,041 million ($1,103 million) compared with the year-ago income of CHF 815 million ($872 million).
Amid an uncertain macroeconomic environment, Credit Suisse reported increased revenues. Further, the company's strong capital position was a positive. However, increases in provision for credit losses as well as expenses remain plausible concerns.
Including one-time items, Credit Suisse's reported net income came in at CHF 1,045 million ($1,108 million). This was higher than CHF 788 million ($843 million) in the prior-year quarter.
Quarter in Detail
Net revenue came in at CHF 7.0 billion ($7.4 billion), up 12% from the prior-year quarter. The rise reflected increases in net interest income other revenues and lower interest expenses. These were partially mitigated by a decline in interest and dividend income as well as trading revenues.
Net interest income was CHF 2.6 billion ($2.7 billion), down 64% from the prior-year quarter. Commissions and fees reached CHF 3.6 billion ($3.8 billion), up 16% year over year.
Provision for credit losses came in at CHF 51 million ($54 million), up significantly from the prior-year quarter.
Core Segment Performances
The Private Banking & Wealth Management segment reported net revenue of CHF 3.4 billion ($3.6 billion), up 1% from the prior-year period. The rise was mainly due to higher transaction and performance based revenues, reflecting improved client activity, and higher recurring commissions and fees. However, these were partly offset by a fall in both other revenues and net interest income.
The Investment Banking unit reported net revenue of CHF 3.9 billion ($4.1 billion), up 24% from the prior-year quarter. The results reflected higher revenues for most of the Investment Banking businesses.
Adjusted total operating expenses were recorded at CHF 5.3 billion ($5.6 billion), up 5% from the prior-year quarter. The rise was primarily attributable to increases in general and administrative expenses, other expenses and commission expenses, partly offset by lower compensation and benefits expenses. The company recorded business realignment costs of CHF 133 million ($141 million) in the Corporate Center for the quarter.
Expense Reduction Initiatives
Credit Suisse continued with its expense run-rate reduction initiatives. As of Jun 30, 2013, the company recorded cost savings of CHF 2.7 billion ($2.9 billion), excluding certain significant items. With this achievement, Credit Suisse remains on track to attain its total run-rate reduction target of CHF 4.4 billion by 2015-end.
Capital and Funding
As of Jun 30, 2013, Credit Suisse's look-through Swiss Core Capital ratio came in at 10.4%, exceeding its previously announced target of 10% for mid-2013. Notably, a look-through ratio considers the risk weightings of assets, which are not directly held by the bank.
Effective from Jan 1, 2013, the Basel III framework has been implemented in Switzerland. As of Jun 30, 2013, Credit Suisse reported a Basel III common equity Tier 1 ratio of 15.3%, up from 14.6% in the prior quarter. The increase in ratio reflects increased common equity Tier 1 capital and a reduction in risk-weighted assets.
Notably, in Oct 2012, the company announced measures to reduce total balance sheet assets by 13% or CHF 30 billion to below CHF 900 billion by the end of 2013 on a foreign-exchange neutral basis.
As of Jun 30, 2013, total balance sheet assets were recorded at CHF 920 billion ($973.0 billion), down 3% sequentially.
Credit Suisse also announced the target to reduce its Swiss leverage exposure - which includes total balance sheet assets and off-balance sheet exposures - to CHF 1,190 billion by year-end 2013. As of Jun 30, 2013, Credit Suisse's Swiss leverage exposure amounted to CHF 1,258 billion ($1330 billion), down 2% from the prior quarter.
The company's Swiss leverage ratio was 3.9%, up from 3.8% in the prior quarter. Credit Suisse's Swiss phase-in leverage ratio is projected to be about 4.5% by year-end 2013, including consensus earnings. The Swiss leverage ratio requirement effective as of Jan 1, 2019 is 4.2%.
In our viewpoint, given the stressed operating environment, earnings of Credit Suisse will remain under pressure in the upcoming quarters. However, prudent business model changes can improve the company's efficiency and bolster its competitive edge.
Amid the uncertain regulatory environment and the eurozone debt crisis, Credit Suisse will focus on generating capital. Its restructuring initiatives are also encouraging. We expect such efforts to improve the company's operating efficiency in the future.
Credit Suisse currently carries a Zacks Rank #4 (Sell). Some other foreign banks, which are performing better include Mitsubishi UFJ Financial Group, Inc. ( MTU ), BBVA Banco Franc ( BFR ) and Sumitomo Mitsui Financial Group Inc. ( SMFG ). All these stocks carry a Zacks Rank #1 (Strong Buy).
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