Fitch: Private Banking Drives Credit Suisse's Resilient 2Q Results
Credit Suisse's new CEO stated that a strategic review of the bank's business lines was under way and that management would set out the bank's revised strategy before end-2015. According to management, the review will aim to strengthen capital-light, cash-generative and less volatile business lines. We expect improving the bank's already strong franchise in Asia Pacific to be a focus of the revised strategy.
Credit Suisse reported a core (excluding non-controlling interests without significant economic interest) pre-tax profit of CHF1,646m, up 7% q-o-q (in 2Q14 Credit Suisse reported a CHF370m pre-tax loss due to sizeable litigation charges). Excluding results from the bank's non-strategic business (CHF166m pre-tax loss compared with CHF284m pre-tax loss in 2Q14), pre-tax profit was 1% lower q-o-q but 2% higher y-o-y. Reported return on equity (ROE), both including fair value of own debt (10%) and excluding it (8%), remained unchanged q-o-q and lags the bank's 15% target. Strategic ROE improved moderately to 13% in 2Q15 from 12% in 1Q15.
Credit Suisse's private banking & wealth management (PB&WM) division was the bank's strongest contributor to overall profitability, with pre-tax profits (CHF1bn in 2Q15) from the strategic business increasing 7% q-o-q (and 13% y-o-y). This was underpinned by stronger revenues (up 4% q-o-q), adequately controlled operating expenses (up 3% y-o-y) and negligible impairment charges.
Within PB&WM, the bank's global wealth management franchise (wealth management clients segment) performed well, driven by solid net new assets (NNA) inflows (CHF9bn) and, more notably, improved assets under management (AuM) margins, both based on revenue (gross margin: 102bps, up 2bps q-o-q) and pre-tax income (net margin: 31bps, up 1bp q-o-q). AuM margin improvements were largely due to higher lending margins and stronger loan volumes.
Management revised down their expectation for NNA outflows from western European offshore (regularisation) clients (up to CHF10bn for 2015 compared with CHF10bn-CHF15bn previously) which together with strong NNA inflows elsewhere, notably in Asia Pacific (CHF6.3bn in 2Q15), should support continued strong NNA inflows.
Pre-tax profits in the bank's predominately domestic corporate and institutional clients (CIC) segment improved 6% q-o-q to CHF244m with resilient revenue and lower operating expenses compensating for a slight uptick in impairment charges. NNA flows were negative in the quarter (CHF1.6bn), largely reflecting Credit Suisse's policy to charge negative interest rates on large corporate and institutional cash deposits. Pre-tax profit in Credit Suisse's asset management division (CHF88m) was up q-o-q but significantly lower y-o-y, largely due to a reorganisation in the bank's Brazilian business (Verde Asset Management), which results in the majority of recurring fees being booked in the fourth quarter.
Pre-tax profit in investment banking (IB) was lower q-o-q and y-o-y, both on a divisional (CHF615m) and adjusted (strategic business only: CHF910m) basis. Lower leveraged finance and emerging market trading revenues contributed to a 10% y-o-y decline (in USD terms) in strategic fixed income revenues, which was the main driver of a 1% fall in divisional USD strategic revenues. Revenue improvements in debt and equity underwriting, advisory as well as equity sales and trading, supported by a good result in Asia Pacific, were insufficient to make up for the drop in fixed income trading revenue.
Total operating expenses in IB were markedly higher in the quarter, (up 5% q-o-q, up 12% y-o-y) reflecting higher litigation costs (up CHF57m q-o-q) and increasing expenses related to regulatory initiatives and investments in risk compliance, as well as the appreciation of the USD versus the SFR.
Pre-tax losses booked in the bank's two non-strategic units (NSU; CHF359m) were 31% larger q-o-q, solely due to wider losses booked in the IB NSU. Still, exit costs in this unit (around 1% of risk-weighted assets; RWA) remain below management's long-term guidance (2% to 3%). The pre-tax result in Credit Suisse's corporate centre was positive for the quarter (CHF94m), largely as a result of CHF268m fair value gains on own credit spreads.
Progress in reducing the bank's leverage exposure was slightly more muted in 2Q15 (down 3.7% q-o-q to CHF1,062bn, compared with a 4.2% reduction in 1Q15) and achieving its end-2015 leverage exposure target of CHF940bn-CHF960bn will in our view have an impact on Credit Suisse's earnings base. In IB, leverage exposure reductions have to date largely included trade compressions, while the bulk of the remaining cuts for 2015 will relate to business optimisations (CHF39bn-CHF48bn for 2H15), which could negatively affect revenues. The bank's fully-applied Basel Tier 1 and common equity Tier 1 leverage ratios improved by around 10bps during the quarter to 3.7% and 2.7% respectively at end-2Q15, lagging management's end-2015 targets (4% and 3% respectively) by 30bps.
The bank's fully-applied CET1 ratio improved by 30bps during the quarter to 10.3%, due to both marginally higher fully-applied CET1 capital (up 1% to CHF28.5bn) and a 2% drop in RWA. CET1 capital benefited from favourable exchange rate movements and a higher-than- expected proportion of scrip dividend payments (63.6% compared with management's assumption of 50%).
Excluding favourable exchange rate movement, RWAs would have been broadly flat q-o-q, reflecting upward pressure on RWA from regulatory changes on how RWA are calculated. Given this and the fairly small size of Credit Suisse' NSUs (IB: CHF9bn RWA; PB&WM: CHF4.5bn RWA), any further improvements in the bank's risk-weighted capitalisation will in our view be driven by further RWA cuts in the bank's business lines or increased capital retention.
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