OREANDA-NEWS. Credit Suisse AG's (Credit Suisse, A/Stable/a-) 2Q16 results showed good progress in executing the accelerated restructuring of the Global Markets (GM) division unveiled in March 2016, which should in the long-term reduce earnings downside, Fitch Ratings says.

The group's performance was helped by strong net new money inflows and higher gross margins yoy on assets under management (AuM) in wealth management businesses, which helped limit the fall in aggregate private banking revenues to 4% yoy in 2Q16 as lower client activity led to lower transaction-based revenues.

Credit Suisse generated pre-tax profit of CHF290m in 2Q16, adjusted for CHF91m restructuring expenses. The result marked a return to profitability following two quarters of adjusted pre-tax losses, largely driven by losses in GM and Investment Banking & Capital Markets (IB&CM). Nonetheless, adjusted pre-tax profit was 80% lower yoy, mainly due to a 24% yoy fall in revenues adjusted for exceptional gains and fair value of own debt.

The group's fully-loaded CET1 ratio strengthened 40bp qoq to 11.8%, largely driven by deleveraging in GM and the Strategic Resolution Unit (SRU) and, to a lesser extent, by modest internal capital generation. Credit Suisse reiterated its intention to operate within a range of 11% to 12% CET1 in 2016, absent major litigation charges. Leverage exposure was marginally lower at CHF967bn at end-2Q16, which led to stable qoq look-through CET1 (3.3%) and Tier 1 (4.4%) leverage ratios.

While the improvement in Credit Suisse's CET1 ratio relieves short-term pressures to generate capital, a potential US RMBS settlement, further restructuring charges or a continued uncertain macroeconomic backdrop could put pressure on capitalisation before the end of the year, when actuarial assumptions around defined benefit pension plans are also reviewed. At end-1H16, the bank had incurred CHF346m restructuring charges out of an expected CHF1bn for 2016.

During the quarter, the bank transferred USD12bn risk-weighted assets (RWAs) and USD62bn leverage exposure out of GM, primarily into the SRU. The bulk of the transfers related to the previously communicated exit from distressed credit and European securitised trading. We expect the remaining businesses within the streamlined GM division to generate more resilient earnings, but the group will rely on significant revenue growth to replace the foregone upside potential. Under more favourable market conditions for these asset classes, we estimate that the GM businesses that have now been closed would have generated revenues of around CHF500m in 2015 and more than CHF1bn in 2014.

Credit Suisse moved forward towards its targeted reduction of the cost base to CHF19.8bn by end-2016, with an annualised run rate of CHF19.4bn in 1H16. Operating expenses adjusted for restructuring charges fell 7% yoy to CHF4.8bn in 2Q16, reflecting the initial benefits of lower contractor headcount and, to a lesser extent, lower deferred compensation. Addressing the inflexibility of the cost base will be key to improving operating leverage in challenging markets.

The Swiss Universal Bank (SUB) will constitute the bulk of the Swiss legal entity, Credit Suisse (Schweiz) AG (A(EXP)/Stable/a(exp)), which will start operating in 4Q16 and part of which the group aims to sell through an initial public offering by end-2017. In 2Q16, SUB was the single largest contributor to pre-tax profit adjusted for restructuring charges and non-recurring items. As part of the group's restructuring, GM's global FX trading business is now booked in Switzerland, split between SUB and International Wealth Management (IWM).

Adjusted for the deconsolidation of Swisscard, restructuring charges and non-recurring items, pre-tax income in SUB rose 6% yoy to CHF457m in 2Q16, led by a 9% yoy reduction in operating expenses. Lower transaction-based income was partly offset by higher net interest income on the back of higher loan balances and higher fees and commissions due to improved mandates penetration.

GM generated adjusted pre-tax income of USD208m in 2Q16, markedly lower yoy (USD473m in 2Q15), reflecting the negative revenue impact of the material reductions in capital consumption. RWAs fell 12% qoq to USD52bn, well below Credit Suisse's USD60bn RWA target for the division, which gives some flexibility to redeploy capital when market conditions improve. The division's results were positively affected by the transfer of selected businesses into the SRU, without which GM would have seen a USD23m pre-tax loss for the quarter. IB&CM also returned to profitability in 2Q16, supported by higher issuance activity and market share gains.

A 7% qoq increase in loan balances helped IWM substantially increase its private banking net interest income (21% yoy), which almost offset lower transactional and fee-based revenue. Net new money growth was particularly strong at 8% in 2Q16. Challenging conditions for equity sales and trading took a toll on the Asia Pacific division, which reported a 41% yoy fall in adjusted pre-tax profit to CHF216m. Similarly to IWM, strong loan growth helped bolster net interest income to support private banking revenues and improve gross margins on AuM, but continued relationship manager hires in the region depressed net margins, down 7bp yoy to 23bp.

Non-core assets booked in the SRU continued to reduce, as RWAs fell 12% qoq to CHF56bn at end-2Q16, partly due to the sale of a credit default swap portfolio. Operating expenses booked in the division also fell as a result of the disposal of the US private banking business, while exit costs of around 1% of RWAs remained well below the group's guidance (2%-5% of RWAs). The group's liquidity coverage ratio increased 21ppts qoq to 172%, partly reflecting preparations for the intermediate holding company in the US, which started operating on 1 July 2016.