By Elena Logutenkova - Nov 1, 2011 5:42 PM GMT+0700
Credit Suisse Group AG (CSGN), the second- biggest Swiss bank, said it will cut about 1,500 more jobs and reorganize its securities unit after the division reported its first quarterly loss since 2008.
Credit Suisse fell the most in almost three years in Zurich trading as third-quarter net income of 683 million Swiss francs ($767 million) missed the 979 million-franc mean estimate of 12 analysts surveyed by Bloomberg.
Chief Executive Officer Brady Dougan, who said current volatility in the markets is “similar” to the 2008 crisis, is adding to the 2,000 staff cuts announced in July. That may make it more difficult for the Zurich-based bank to compete with larger rivals amid the European sovereign debt crisis and as the global economic slowdown crimps investment-banking revenue.
“The bank is trying to resolve its earnings problems by aggressive downsizing,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It’s very difficult to achieve as once you fall out of the competition with the biggest investment banks it gets harder to attract good people even in areas the company wants to keep. Rivals will be happy.”
Credit Suisse dropped as much as 10 percent, the biggest intraday decline since December 2008, and was down 8.2 percent at 23.51 francs as of 11:37 a.m. in Zurich. The stock is down 35 percent this year, compared with 30 percent declines at larger rival UBS AG and the 46-company Bloomberg Europe Banks and Financial Services Index.
Investment-Banking Loss
Credit Suisse’s investment bank reported a pretax loss of 190 million francs for the quarter, compared with a profit of 395 million francs in the year-earlier period. Earnings at the private bank slumped 78 percent to 183 million francs after the company made 478 million francs of litigation provisions for tax settlements in Germany and the U.S. Asset management profit fell 32 percent to 92 million francs.
“We believe subdued economic growth and the low interest rate environment and increased regulation that we are seeing may persist for an extended period,” Dougan said in a statement. “We may well continue to see continued low levels of client activity and a volatile trading environment.”
Credit Suisse’s job cuts will reduce the bank’s total headcount by almost 7 percent from the current 50,700 by the end of 2013. That will save about 2 billion francs in annual costs, the bank said. While the cuts will be spread across the group, the private bank will be less affected, Chief Financial Officer David Mathers told reporters on a conference call.
Market Volatility
Credit Suisse had added about 4,000 employees since the beginning of 2009, including staff at the investment bank, to try to gain a bigger market share after surviving the subprime crisis with lower losses than some peers. The bank increased its target for cutting risk-weighted assets by 57 percent.
Compared to 2008, “the volatility in the markets is similar in terms of the fact that people are taking a much more conservative approach to how they actually conduct themselves in financial matters,” Dougan said in an interview. “We need to have a period of more stability before we can get the markets and players in the markets acting in a more consistent way.”
UBS and Deutsche Bank AG, the biggest bank in Germany, last week signaled more jobs may be at risk amid demands for more capital and as a deteriorating global economy hurts investment- banking revenue.
Targets Scrapped
Deutsche Bank Chief Financial Officer Stefan Krause said Oct. 25 the Frankfurt-based lender will continue to adjust its “platform” if the challenging environment persists after announcing 500 job cuts earlier that month. His UBS counterpart Tom Naratil said in an interview the same day that a reorganization of the investment bank, which the Zurich-based company plans to announce on Nov. 17, may lead to a lower headcount at the unit.
Dougan cut Credit Suisse’s profitability goal in February, blaming stricter capital requirements, and now aims for a return on equity of more than 15 percent over the next three to five years, down from a previous goal of more than 18 percent. Tougher rules from the Basel Committee on Banking Supervision and Swiss regulators will require the bank to hoard more capital for its securities business.
Credit Suisse, UBS, Deutsche Bank and Barclays Plc have already disclosed plans to shrink their combined risk-weighted assets by as much as $415 billion to prepare for the stricter capital requirements under Basel III rules. As the euro area’s sovereign debt crisis erodes earnings, the banks may have little choice but to accelerate asset reductions and job cuts, analysts including JPMorgan Chase & Co.’s Kian Abouhossein said last month.
Shrinking Assets
Third-quarter profit at Credit Suisse rose 12 percent, helped by an accounting gain from the widening of its credit spreads, the Zurich-based bank said today. That gain stems from a rule that required banks to write down the value of their debts as investors grow less confident of a company’s ability to repay them during the quarter.
Credit Suisse, which previously aimed to reduce risk- weighted assets by as much as 70 billion francs to prepare for Basel III, said today it will cut them by 110 billion francs, including some 99 billion francs at the fixed-income unit, by the end of 2014.
“They are becoming a niche player in certain parts of investment banking,” said Becker of Kepler. “For them, it doesn’t make sense to retain a presence in fixed income.”
Exiting Business
The bank is exiting the business of commercial mortgage- backed securities origination and will scale down long-dated unsecured trades in global rates, emerging markets and commodities businesses. It will also shrink its advisory businesses to reduce any overlaps in covering certain countries, industries and products, Credit Suisse said.
The measures will improve the return on equity at the investment bank, which would have slumped by 9 percentage points without any measures. After cuts in risk-weighted assets all businesses at the investment bank should be producing a return on equity in excess of Credit Suisse’s 15 percent target, Dougan said.
Credit Suisse’s private bank needs to prepare for “a difficult environment” as its decline in profitability is “more than a cyclical slump,” Hans-Ulrich Meister, who took over as head of the division on Aug. 1, told staff in an internal memo in September.
Litigation Provisions
The annualized gross margin in wealth management, or the amount of revenue earned on assets under management, fell to 114 basis points in the third quarter from 131 basis points in 2009. A basis point is one-hundredth of a percentage point.
The bank said today it will aim to expand its business with ultra-high-net-worth individuals and with clients who book assets in their countries of residence, seeking to boost pretax profit at the private bank by 800 million francs by 2014.
Credit Suisse in September agreed to pay 150 million euros ($210 million) to settle proceedings in Germany against employees investigated for allegedly helping German clients evade taxes. The bank made provisions for the German settlement and set aside 295 million francs for U.S. tax matters, it said.
The bank is a target of a criminal investigation by the U.S. Department of Justice over former cross-border private- banking services to American customers, the company said in July. Eight bankers, including Credit Suisse’s former head of North America offshore banking, were charged with conspiring to help American clients evade taxes through secret bank accounts. Credit Suisse said at the time that it’s cooperating with the U.S. authorities “subject to our Swiss legal obligations.”
Swiss banks will probably settle a sweeping U.S. probe of offshore tax evasion by paying billions of dollars and handing over names of thousands of Americans who have secret accounts, two people familiar with the matter who declined to be identified because the talks are confidential, said last month.
To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
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