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Credit Suisse Posts Encouraging Q4 Earnings

CS BCS DB HDB

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Aided by higher revenues, Credit Suisse Group (CS - Snapshot Report) reported fourth-quarter 2013 adjusted net income of CHF 1,321 million ($1,462.1 million) up 11% from the year-ago quarter. For 2013, the adjusted net income was CHF 5.8 billion ($6.4 billion), up 16% from 2012.

Credit Suisse’s results came on the back of increased revenues in the Private Banking & Wealth Management segment as well as Investment Banking segment. Further, lower provisions were a tailwind.  However, rising expenses, in spite of cost control measures, remain a concern.

Including one-time items, Credit Suisse’s reported net income came in at CHF 428 million ($473.7 million), up 11% year over year. For 2013, the reported net income was CHF 4.5 billion ($5.0 billion), up substantially from 2012.

Quarter in Detail

Net revenue came in at CHF 6.0 billion ($6.6 billion), up 6% from the prior-year quarter. The rise was due to higher trading revenues.  

For 2013, net revenues were CHF 25.3 billion ($28.0 billion), up 9% year over year.

Net interest income was CHF 1.7 billion ($1.9 billion), down 10% from the prior-year quarter. Commissions and fees came in at CHF 3.4 billion ($3.8 billion), down 1.0% year over year.

Provision for credit losses came in at CHF 41.0 million ($45.4 million), down 41% from the prior-year quarter.

Core Segment Performances

The Private Banking & Wealth Management segment reported net revenue of CHF 3.4 billion ($3.8 billion), up 4% from the prior-year period. The rise was mainly due to rise in transaction and performance-based revenues in the strategic businesses and increase in management fees from hedge funds and alternative products in Asset Management.

The Investment Banking unit reported net revenue of CHF 2.7 billion ($3.0 billion), up 2% from the prior-year quarter. The rise was mainly due to reduced net revenue losses from non-strategic businesses and solid performance in strategic businesses, partly offset by lower rates.

Adjusted total operating expenses were recorded at CHF 5.5 billion ($6.1 billion), up 7% from the prior-year quarter. The increase was primarily attributable to rise in compensation and benefits costs, general and administrative expenses as well as other expenses.

Litigation Provisions

In the reported quarter, Credit Suisse recorded litigation provisions of CHF 339 million ($375.2 million) related to mortgage litigations and CHF 175 million ($193.7) in connection with the SEC-related aspect of the U.S. tax issue.

Expense Reduction Initiatives

Credit Suisse continued with its expense reduction initiatives. As of the end of the fourth quarter of 2013, Credit Suisse generated expense savings of CHF 3.1 billion ($3.4 billion). The company is on track to achieve its end-2015 total run-rate reduction target of over CHF 4.5 billion. As part of the cost savings initiatives, Credit Suisse reduced total compensation and benefits expense for the full-year 2013 by 8% from 2012, driven by a 10% reduction in Investment Banking segment. Business realignment costs in the Corporate Center in the quarter were CHF 131 million ($145.0 million).

Capital and Funding

As of Dec 31, 2013, Credit Suisse’s Look-Through Total Capital ratio came in at 16.1%, up from 14.5% in prior quarter. The Look-through Basel III CET 1 ratio was 10.3%, up from 10.2% in the prior quarter.

The Basel III CET1 ratio was 16.0%, down from 16.3% in the prior quarter primarily due to increase in risk-weighted assets.  Basel III risk-weighted assets rose 2% sequentially to CHF 273.8 billion ($303.0 billion) as of the end of the quarter, reflecting an increase in operational risks and a marginal rise in market risk, partially offset by decrease in credit risk and a decrease resulting from foreign exchange translation.

As of Dec 31, 2013, the Look-Through Swiss Total Capital leverage ratio improved to 3.8% from 3.2% at the end of the prior quarter.

Our Viewpoint

Given the challenged macroeconomic environment, we expect Credit Suisse’s earnings to remain under pressure, going forward. However, prudent business model changes can improve the company’s efficiency and bolster its competitive edge.

Credit Suisse’s focus on capital generation and restructuring initiatives are encouraging. We expect such efforts to improve the company’s operating efficiency in the future.

At present, Credit Suisse carries a Zacks Rank #3 (Hold). Better-ranked foreign banks include Barclays PLC (BCS - Snapshot Report), Deutsche Bank AG (DB - Analyst Report) and HDFC Bank Ltd. (HDB - Analyst Report). All these stocks have a Zacks Rank #2 (Buy).

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