Credit Suisse May Report Profit, Beating UBS for Third Quarter

By Elena Logutenkova

July 23 (Bloomberg) -- Credit Suisse Group AG, the second- biggest Swiss bank, probably was profitable in the past three months, beating larger rival UBS AG for the third straight quarter.

The Zurich-based company may report second-quarter net income of 617 million Swiss francs ($598 million) tomorrow, according to the median estimate of 14 analysts surveyed by Bloomberg. UBS said earlier this month that earnings were ``at or slightly below break-even,'' even with about 3 billion francs of tax credits.

Chief Executive Officer Brady Dougan said in April he was managing the bank under the assumption that markets would be ``very difficult,'' while counterparts at unprofitable banks led by Citigroup Inc. and UBS said the credit crunch was almost over. Credit Suisse probably will report 1.5 billion francs of subprime-infected writedowns after slashing the value of leveraged loans and real estate assets by 59 percent in the six months ended in March.

``Allocation of capital was better at Credit Suisse than at UBS,'' said Karim Bertoni, a Geneva-based fund manager at Banque Syz & Co., which oversees $26 billion. ``They had fewer writedowns in the past quarters and will probably continue to fare better.''

Credit Suisse would follow New York-based Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. in reporting second-quarter earnings. New York-based Citigroup, the biggest U.S. bank by assets, had a net loss of $2.5 billion.

Deutsche Bank AG, Germany's biggest bank, may report a second-quarter net income of 566 million euros ($893 million) on July 31, according to the median estimate of seven analysts.

Citigroup, Merrill Lynch

Credit Suisse dropped 32 percent this year in Swiss trading, compared with the 53 percent slump of UBS, the sixth-biggest loser in the 71-member Bloomberg Europe Banks and Financial Services Index.

Dougan has said the bank started scaling back business with subprime mortgages as early as 2006. The 48-year-old American, who spends about half his time in Switzerland, disclosed in February that the bank discovered it had to write down the value of debt securities that were deliberately mispriced by traders.

Credit Suisse wrote down almost 10 billion francs from last July through the end of March, compared with more than $38 billion at UBS and more than $46 billion at Merrill Lynch & Co., the third-biggest U.S. securities firm, data compiled by Bloomberg show. Goldman Sachs had $3.8 billion of writedowns.

New Money

Subprime losses at UBS, which holds more assets for affluent clients than any other bank, and Merrill Lynch are helping Credit Suisse's private bank. The company gained 5.3 billion francs of assets from wealthy clients in Switzerland in the first quarter and 8.2 billion francs from the rest of the world. UBS lost 2.5 billion francs in its home market, cutting total net new money from rich customers to 5.6 billion francs.

Credit Suisse probably added about 11 billion francs of net new assets at the wealth management unit in the second quarter, according to a Bloomberg survey of analysts including Citigroup's Jeremy Sigee.

``Industry-wide flows appear to be slowing, but Credit Suisse may win clients from UBS,'' Sigee, who has a ``buy'' rating on the stock, said in a note to clients. ``Credit Suisse has recently accelerated adviser recruitment.''

Tightening Rules

While lower losses relative to its main rival helped win clients, they haven't protected Credit Suisse from calls for tighter capital rules. Regulators have proposed a limit on the amount of assets the two biggest banks can accumulate relative to equity, in addition to the current Basel II rules that regulate capital according to risk-weightings of assets.

To reach a leverage ratio of 4 percent to 5 percent, Credit Suisse would need to conserve about 3 years of dividends and buybacks and shrink its balance sheet, said Morgan Stanley analyst Huw van Steenis. The bank didn't repurchase shares between early March and mid-May under an 8 billion-franc buyback program started last year.

``The strong-arm tactics of the regulator in Switzerland make us less certain that Credit Suisse will be able to take advantage of its better stewardship of the credit crisis than some of its peers,'' Alan Webborn, an analyst with Societe Generale, said in a note this week, cutting his 2009 earnings estimate. ``Maintaining capital strength remains a priority.''

The bank has criticized the regulator's proposal to limit leverage, arguing that it won't solve the problems that banks most-affected in the subprime crisis faced, such as liquidity shortage.

``It's dangerous if we go it alone in Switzerland,'' Tobias Guldimann, group chief risk officer, said at a conference in Bern on June 30. ``Clumsy rules can have a negative impact'' on the banks' competitiveness internationally.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net