Fitch: Robust 1Q15 at Credit Suisse; RWA Cuts Challenging
Credit Suisse reported a core (excluding non-controlling interests without significant economic interest) pre-tax profit of CHF1,538m for 1Q15, up 71% on 4Q14 (which was dented by significant litigation charges) and 10% higher year-on-year (y-o-y). Excluding pre-tax losses booked in its non-strategic units (NSU, CHF284m in 1Q15), Credit Suisse's pre-tax income stood at CHF1,822m in 1Q15, 26% higher q-o-q but 6% lower y-o-y.
Despite improvements in its reported return on equity (10% in 1Q15; 8% excluding fair value of own debt) both q-o-q (6% in 4Q14) and y-o-y (8% in 1Q14), Credit Suisse will, in our view, be challenged to achieve its 15% target in the medium-term given the bank's focus on further reducing its leverage exposure, continued elevated litigation charges and NSU wind-down costs. Its return on equity in its strategic businesses was 12% in 1Q15 compared with 11% in 4Q14 and 14% in 1Q14.
Lower earnings from Credit Suisse's private banking and wealth management (PB & WM) division (strategic pre-tax profit of CHF938m in 1Q15; down 7% q-o-q and down 3% y-o-y) mainly related to the sharp appreciation of the Swiss franc in January 2015, which affected net interest revenue in domestic banking operations. While overall PB & WM revenues were predictably lower (7% q-o-q; 3% y-o-y), operating expenses were reduced in line with management's cost reduction plan and loan impairment charges remained immaterial. Strategic net new asset (NNA) inflows were strong (CHF18.4bn compared with CHF0.2bn outflows in 4Q14).
In particular, Credit Suisse's international private banking segment (Wealth Management Clients, WMC, 68% of PB & WM strategic pre-tax income in 1Q15) reported improved revenues (both q-o-q and y-o-y if one-offs are excluded), as a result improved lending margins, higher loan volumes, in line with its strategy to increase these, and improved transaction fees largely from its foreign exchange business following the Swiss National Bank's decision in January to unpeg the Swiss franc.
WMC's gross margin for assets under management (AuM) improved slightly q-o-q to 100bps in 1Q15, largely as a result of higher net interest income (NII) and increased FX transaction fees compensating for lower management fees which suffered from adverse foreign currency translation impact. WMC's net AuM margin improved by 3bps to 30bps, predominately due to lower operating expenses.
Revenues in Credit Suisse's domestic corporate lending business (corporate and institutional clients; CIC; 25% of PB & WM strategic pre-tax income in 1Q15) were most affected by the SNB policy decision. NII (CHF240m) declined 17% q-o-q (7% y-o-y). However, this was almost completely offset by improved transaction-based income reflecting increased client trading activity and the need of Swiss corporate clients to increasingly hedge their foreign currency exposure. Loan impairment charges in this segment remained immaterial but, in Fitch's view, could be negatively affected in 2015 by the recent Swiss franc appreciation.
The bank's asset management division (AM; 8% of PB & WM strategic pre-tax income) reported significantly reduced profitability largely as a result of fees from Credit Suisse's Brazilian asset management activities (Verde Asset Management) now being booked in the fourth quarter instead of being accrued throughout the year. NNA inflows in AM (CHF10.2bn) were strong but we expect NNA movements in AM to remain volatile.
The result of Credit Suisse's investment banking (IB) division in 1Q15 (CHF1,115m pre-tax income excluding IB NSU) were overall solid but demonstrated the bank's increasing reliance on certain IB business lines, notably within its fixed income division. In line with those of its US peers that have already reported 1Q15 results, sales and trading revenue in both fixed income and equities performed considerably better than its underwriting and advisory franchises where Credit Suisse lost market share in 1Q15.
Strategic IB revenue (i.e. excluding IB NSU) markedly improved q-o-q (up 32%) largely as a result of strong fixed income sales and trading offsetting disappointing revenues in equity underwriting and advisory. Within fixed income, Credit Suisse's securitised products, emerging markets and macro businesses continued to perform well, which more than compensated for a fall in revenues from its leverage finance activity, largely in the US.
Similar to 4Q14, strategic equity revenue (CHF1.5bn; up 3% q-o-q, 8% y-o-y) was underpinned by Credit Suisse's solid equity and prime services franchises benefiting from higher market volatility and growth in Asia. This offset sharply lower equity underwriting revenue.
Credit Suisse's IB NSU reported a pre-tax loss of CHF170m in 1Q15, markedly improved on 4Q14 which included a CHF171m negative impact from the first-time recognition of funding value adjustments. The bank's smaller PB & WM non-strategic unit reported a CHF104m pre-tax loss in 1Q15, slightly improved on 4Q14. Credit Suisse's core corporate centre (i.e. excluding the two NSUs) reported a CHF231m pre-tax loss, CHF94m higher q-o-q partly as a result of higher-than-expected costs related to the legal entity programme. The latter included the establishment of an intermediate holding company in the U.S. a separate Swiss legal entity and a shared services company.
Reflecting increasing regulatory scrutiny both in Switzerland and globally, balance sheet leverage is now a more binding constraint than risk-weighted capitalisation in capital and balance sheet management. Credit Suisse targets an end-2015 common equity Tier 1 (CET1) leverage ratio of 3% (2.6% at end-1Q15), Tier 1 leverage ratio of 4% (3.6% at end-1Q15) and a Swiss total leverage ratio (including all contingent convertible capital instruments) of 4.5% (4.2% at end-1Q15).
In 1Q15, Credit Suisse made progress towards its end-2015 leverage exposure target (CHF960bn to CHF990bn) by reducing leverage exposure by CHF47bn to CHF1.1bn. The reduction was largely due to shrinking IB leverage exposure and positive FX movements, partly offset by growth initiatives in PB & WM.
While leverage exposure reduction to-date has not affected strategic IB profitability, including its typically balance-sheet intensive businesses such as prime services, a planned further CHF110bn-CHF140bn reduction for the remainder of 2015 will, in our view, be challenging to achieve without negatively affecting strategic IB revenue. Management stated in March 2015 (based on end-2014 data) that leverage reduction from client and business optimisation (around USD70bn at end-2014) would potentially result in a revenue loss of around USD300m.
The bank's fully-loaded CET1 ratio fell 10bps during 1Q15, as share purchases for employee share deliveries drove a CHF300m q-o-q fall in CET1 capital to CHF28.3bn. Credit Suisse's fully-loaded total capital ratio, which includes significant layers of low- and higher trigger contingent convertible capital instruments, fell 20bps to 16.2%.
While a reduction in leverage exposure should also support an improvement in Credit Suisse's RWA, further RWA reduction will, in our view, be more difficult than in the past two years. RWA in its two NSUs have already been reduced to low levels (CHF4bn in its PB &WM NSU, CHF9bn in its IB NSU), making further significant reductions of exposures (which are also probably going to be the more complex ones) unlikely.
In addition, regulatory reviews of RWA model calculations including in the medium-term Basel fundamental review of the trading book, will likely result in upward pressure on RWA. Consequently, any significant further reduction in RWA below CHF280bn (CHF283bn at end-1Q15) will not be achievable by RWA optimisation alone but, in our view, by Credit Suisse exiting RWA-intensive businesses.
Комментарии