Credit Suisse Q3 Earnings Disappoint - Analyst Blog

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Credit Suisse Group ( CS ) reported third-quarter 2013 adjusted net income attributable to shareholders of CHF 698 million ($749 million) compared with the year-ago quarter income of CHF 1051 million ($1092.4 million).

Credit Suisse's results were primarily affected by fall in revenues, primarily in the investment banking segment. However, expenses declined owing to prudent cost control measures.

Including one-time items, Credit Suisse's reported net income came in at CHF 454 million ($487 million). This was higher than CHF 254 million ($264.0 million) in the prior-year quarter.

Quarter in Detail

Net revenue came in at CHF 5.7 billion ($6.1 billion), down 1% from the prior-year quarter. The decline was due to lower interest and a fall in dividend income and other revenues. These were partially mitigated by rise in net interest income and trading revenues, along with lower interest expenses.

Net interest income was CHF 1.9 billion ($2.0 billion), up 12% from the prior-year quarter. Commissions and fees came in at CHF 3.0 billion ($3.2 billion), down 4.0% year over year.

Provision for credit losses came in at CHF 41.0 million ($43.9 million), stable from the prior-year quarter.

Core Segment Performances

The Private Banking & Wealth Management segment reported net revenue of CHF 3.3 billion ($3.5 billion), up 1% from the prior-year period. The rise was mainly due to increase in other revenues as well as recurring commissions and fees, partly offset by lower net interest income.

The Investment Banking unit reported net revenue of CHF 2.6 billion ($2.8 billion), down 20% from the prior-year quarter. Rise in equity sales and trading were more than offset by fall in fixed income sales and trading revenues as well as poor underwriting and advisory results.

Adjusted total operating expenses were recorded at CHF 4.7 billion ($5.0 billion), down 11% from the prior-year quarter. The decline was primarily attributable to fall in general and administrative expenses, other expenses as well as compensation and benefits expenses, partly offset by higher commission expenses. The company recorded business realignment costs of CHF 38 million ($141 million) in the Corporate Center for the quarter.

Expense Reduction Initiatives

Credit Suisse continued with its expense reduction initiatives. As of Sep 30, 2013, the company recorded cost savings of CHF 3.0 billion ($3.2 billion), excluding certain significant items. Additionally, the company updated its end-2015 total run-rate reduction target from the previous CHF 4.4 billion to over CHF 4.5 billion, reflecting impact of the non-strategic unit plan.

Capital and Funding

As of Jun 30, 2013, Credit Suisse's look-through Swiss Core Capital ratio came in at 11.4%. 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 Sep 30, 2013, Credit Suisse reported a Basel III common equity Tier 1 ratio of 16.3%, up from 15.3% in the prior quarter. The increase in ratio reflects reduction in risk-weighted assets.

Credit Suisse's capital ratio under the Common Equity Tier 1 plus high-trigger capital requirement stood at 13.2% on a look-through, adjusted basis, meeting the Swiss requirement of 13%, applicable in 2019. Additionally, as of Sep 30, 2013, Credit Suisse reported a Look-through Basel III common equity tier 1 ratio of 10.2%, up from 9.3% in 2Q13.

Based on establishment of the divisional non-strategic units, Credit Suisse updated its year-end 2013 Swiss leverage exposure reduction target to CHF 1,070 billion, from the previous target of CHF 1,190 billion. As of the end of the third quarter, Credit Suisse's Swiss leverage exposure amounted to CHF 1,184 billion, down from the prior quarter. The Look-through Swiss Total Capital leverage ratio improved to 3.5%, on an adjusted basis, compared to 2.7% at the end of 2Q13.

Credit Suisse has also updated its long-term Look-through risk-weighted asset target to approximately CHF 250 billion from the previous target of CHF 285 billion for year-end 2015 on a foreign-exchange neutral basis. The target was revised after the creation of the divisional non-strategic units. At the reported quarter-end, Group Look-through risk-weighted assets were CHF 261 billion.

Other Developments

Along with the earnings release, Credit Suisse announced that it would create a non-strategic unit in each of its two divisions to reduce costs related to non-strategic activities and to increase focus on its businesses and growth initiatives. There will be separate management for each division. The impact of this development will likely be reflected in fourth-quarter earnings and onwards.

In Investment Banking, Credit Suisse is allocating its existing Fixed Income wind-down portfolio, parts of a restructured rates business - primarily legacy capital instruments that are not compliant with Basel III and capital-intensive structured positions - as well as certain legacy litigation costs and other small non-strategic positions to the divisional non-strategic unit.

In Private Banking & Wealth Management, Credit Suisse is undertaking similar measures to include positions related to restructuring of the former Asset Management division. The positions include operations relating to the small markets initiative, selected legacy cross-border related run-off operations and litigation costs, primarily US cross-border, as well as the impact from the restructuring of the German onshore operation.

Credit Suisse expects that the establishment of these non-strategic units to drive further reduction in leverage and risk-weighted assets. It is also expected to free up capital for the Private Banking & Wealth Management unit as well as to enhance returns to shareholders. Credit Suisse considers this a significant step toward achieving a balanced allocation of capital between the two divisions.

Our Viewpoint

Given the challenged macroeconomic environment and the eurozone debt crisis, we expect Credit Suisse's earnings to remain under pressure, going forward. However, prudent business model changes can improve the company's efficiency and bolster its competitive edge.

Credit Suisse's focus on capital generation and restructuring initiatives are encouraging. We expect such efforts to improve the company's operating efficiency in the future.

Credit Suisse currently carries a Zacks Rank #1 (Strong Buy). While we prefer Credit Suisse, other foreign banks having the same Zacks Rank include Banco Bilbao Vizcaya Argentaria, S.A. ( BBVA ), Deutsche Bank AG ( DB ) and Banco Santander, S.A. ( SAN ).

BANCO BILBAO VZ (BBVA): Free Stock Analysis Report

CREDIT SUISSE (CS): Free Stock Analysis Report

DEUTSCHE BK AG (DB): Free Stock Analysis Report

BANCO SANTAN SA (SAN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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