Credit Suisse Group AG (CSGN), the second-biggest Swiss bank, posted a 33 percent jump in second-quarter profit as earnings at the investment bank more than doubled.
Net income climbed to 1.05 billion Swiss francs ($1.1 billion) from 788 million francs a year earlier, the Zurich-based bank said today. Earnings compare with the 1.03 billion-franc average estimate of 10 analysts surveyed by Bloomberg.
The wealth management business attracted 7.5 billion francs of net new money from clients in the quarter and increased margins on the funds it oversees. While earnings rose at the investment bank, the fixed-income unit posted a bigger revenue decline from the first quarter than most of its largest competitors. The shares fell as much as 3 percent in Zurich.
“We are a bit disappointed with fixed-income results at second worst in the industry so far and worst in terms of quarter-on-quarter decline,” Kian Abouhossein and Amit Ranjan, JPMorgan Chase & Co. (JPM:US) analysts who rate Credit Suisse overweight, wrote in a note to clients.
Credit Suisse said its rates and emerging markets businesses, both part of the fixed-income unit, were hurt by reduced client activity in a volatile trading environment in the quarter. Chief Executive Officer Brady Dougan also said he increasingly sees the rates business being affected by regulatory constraints, such as a greater focus on leverage.
Revenue from equities trading and from underwriting and advisory rose 24 percent and 45 percent from a year earlier, respectively, while the fixed-income unit showed a 13 percent increase. Debt revenue fell 38 percent from the first quarter in U.S. dollars, compared with an average 23 percent decline at U.S. competitors, adjusted for own debt valuations, data compiled by Bloomberg Industries show.
“While the wealth management unit clearly was a positive surprise, we had expected better results from the investment bank in view of the outperforming U.S. investment banks,” Teresa Nielsen, a Zurich-based analyst at Vontobel with a hold rating on Credit Suisse, said in a note.
Credit Suisse fell 2.7 percent to 27.64 francs by 11:42 a.m. in Zurich trading, after climbing 13 percent in the previous three weeks. The company has gained 27 percent this year, compared with an 8.8 percent increase in the Bloomberg Europe Banks and Financial Services Index, which tracks 40 companies.
“We saw a pretty good second quarter in terms of client activity,” Dougan, 53, said in a Bloomberg Television interview. “How that will play out for the rest of the year remains to be seen. The pipelines are pretty strong, so there is actually a fair amount of business to be done if the markets are there to do it.”
Credit Suisse carried out more than 60 percent of 4.4 billion francs in cost cuts planned by the end of 2015 by eliminating jobs and reorganizing businesses at the investment bank. Dougan said last month the bulk of future savings will come from private banking and wealth management as well as wringing expenses from operations that cross divisions.
“The results show progress,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA with an outperform rating on Credit Suisse. “The investment bank did OK. And wealth management saw margins creep up, which is what they’ve been needing to show.”
The investment bank posted a pretax profit of 754 million francs, up from 314 million francs in the year-earlier period as revenue rose 24 percent. JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley (MS:US) reported a cumulative 24 percent gain in revenue at their investment banks from the year-earlier quarter, excluding own debt valuations, data compiled by Bloomberg Industries show.
The private banking and wealth management division, which includes all other businesses, saw profit fall 6.1 percent to 917 million francs. Wealth management gross margin, which reflects the revenue made on assets overseen at the unit, increased to 111 basis points from 109 basis points in the first quarter. A basis point is one hundredth of a percentage point.
Market volatility related to rising interest rates “continued into July, although more recently we have seen signs of stabilization in our major markets,” Dougan said in the statement. “In the longer term, the transition to higher rates will benefit our business.”
Wealth management profit was hurt by a 100 million-franc charge related to a Swiss-U.K. tax agreement, which requires banks to collect taxes on accounts of U.K. citizens and has been in force since January. The Swiss Bankers Association said earlier this month that the country’s banks face losses of about 500 million francs on payments made to the U.K. government as part of the deal related to untaxed assets in Switzerland.
Julius Baer Group Ltd. (BAER), Switzerland’s third-biggest wealth manager, said this week that increased client trading boosted margins. UBS AG (UBSN), Switzerland’s biggest bank, reported quarterly earnings that beat analysts’ forecasts this week, and plans to provide further details on July 30.
Dougan said last month the bank is working on boosting the profitability of its wealth management businesses in the U.S. and western Europe, while it expects “solid growth” in its Swiss and emerging-markets units. Credit Suisse is seeking to “enhance efficiency” in its onshore wealth-management units in western Europe and expand product offerings in the U.S., Dougan said at an investor conference in New York.
The bank is losing money in its U.S. wealth management unit and turning that around would help boost profitability, Chief Financial Officer David Mathers said today.
Credit Suisse is considering the sale of part of its wealth management business in Germany, three people with knowledge of the matter who asked not to be identified said last month. The bank may focus on ultra-rich clients and sell the remainder of accounts, said two of the people. Dougan said the bank is weighing all options for the German business, without being more specific.
Credit Suisse said in 2011 it would seek to increase profit at its private bank by 800 million francs by 2014 as sluggish client activity squeezed margins. The company integrated its Clariden Leu wealth management unit with the rest of the division and merged consumer and private-banking units in Switzerland to cut expenses. Last year, the bank said it would also combine private banking with asset management to boost efficiency and improve cooperation.
The bank is trying to resolve a U.S. investigation into whether some of its private bankers may have helped American clients evade taxes. Credit Suisse has been a target of a criminal investigation by the Department of Justice over former cross-border private-banking services to American customers since at least July 2011. About a dozen other Swiss banks are also being investigated.
Credit Suisse said today it got permission from the Swiss authorities to pass on data to the U.S. relating to American clients who moved their accounts to other institutions. The bank is in the process of preparing that data now, Mathers told journalists on a conference call.
“Quite a lot of data and analysis has been delivered on a redacted basis over the course of the last 18 months,” Mathers said. “The next installment will be the so-called leaver analysis and we’ll see where we go from there. We’d clearly welcome such a resolution in the second half and we’re actively seeking to achieve it, but I don’t think we could make a commitment or a forecast that it necessarily will be resolved in the second half of the year.”
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