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Credit Suisse Posts Strong 1Q Earnings

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Credit Suisse Group (CS - Free Report) reported first-quarter 2013 adjusted net income attributable to shareholders of CHF 1,462 million ($1,572 million) compared with the year-ago  income of CHF 1,055 million ($1,144 million).

Amid an uncertain macroeconomic environment, cost-savings initiatives were successful as operating expenses decreased. Further, a strong capital position and reduced provision for credit losses were the headwinds. However, decline in top line remains a matter of concern.

Including one-time items, Credit Suisse’s reported net income came in at CHF 1,303 million ($1,401 million) in the reported quarter. This was substantially higher than CHF 44 million ($48 million) in the prior-year quarter.

Quarter in Detail

Adjusted net revenue came in at CHF 7.2 billion ($7.7 billion), down 1.4% from the prior-year quarter. The decline reflected lower interest and dividend income along with reduced other revenues. These were partially mitigated by increased commissions and fees income as well as elevated trading revenues.

Reported net interest income stood at CHF 1.8 billion ($1.9 billion), falling 5.3% from the prior-year quarter. However, commissions and fees reached CHF 3.3 billion ($3.5 billion), up 3.1% year over year.

Provision for credit losses came in at CHF 22 million ($24 million), down from CHF 34 million ($37 million) in the prior-year quarter.

Core Segment Performances

Private Banking & Wealth Management segment reported net revenue of CHF 3.3 billion ($3.5 billion), decreasing 5% from the prior-year period. The dip was mainly driven by the partial sale of an investment in Aberdeen Asset Management (Aberdeen) in the prior-year quarter and lower net interest income, partially mitigated by higher recurring commissions and fees.

The Investment Banking unit reported net revenues of CHF 3.9 billion ($4.2 billion), almost in line with the prior-year quarter. The stable results reflect elevated revenues in fixed income sales and trading along with underwriting and advisory, offset by reduced equity sales and trading results.

Adjusted total operating expenses were recorded at CHF 5.2 billion ($5.6 billion), down 8.8% from the prior-year quarter. The decline was primarily attributable to reduced compensation and benefits expenses, partially offset by increased commission expenses and a rise in general and administrative expenses.

In the reported quarter, business realignment costs of CHF 92 million ($99 million) were incurred in the Corporate Center segment.

Expense-saving Initiatives

Credit Suisse continued with its expense run-rate reduction initiatives. As of Mar 31, 2013, the company recorded cost savings of CHF 2.5 billion, excluding certain significant items. Therefore, with this achievement, Credit Suisse remains on track to attain its total run-rate reduction target of CHF 4.4 billion by 2015-end.

Capital and Funding

As of Mar 31, 2013, Credit Suisse’s Look-through Swiss Core Capital ratio came in at 9.8%. Based on current data, it is expected that the company will exceed the Swiss end-2018 requirement of 10% by the middle of 2013. Notably, a look-through ratio considers the risk weightings of assets, which are not directly held by the bank.

Effective Jan 1, 2013, the Basel III framework has been implemented in Switzerland. As of Mar 31, 2013, Credit Suisse reported a Basel III common equity tier 1 ratio of 14.6%, up from 14.2% reported in the prior quarter. The increase in ratio reflects elevated tier 1 capital and a rise in risk-weighted assets.

Notably, in Oct 2012, the company announced measures to reduce total balance sheet assets by 13% or CHF 30 billion to below CHF 900 billion by the end of 2013 on a foreign-exchange neutral basis.

As of Mar 31, 2013, total balance sheet assets were recorded at CHF 947 billion, up 2.5% sequentially. The company’s Swiss leverage ratio stood at 3.8%, down from 5.8% in the prior quarter.

Our Viewpoint

In our viewpoint, given the stressed operating environment, earnings of Credit Suisse will remain under pressure in the upcoming quarters. However, prudent business model changes can improve the company’s efficiency and bolster its competitive edge.

Amid the uncertain regulatory environment and the Eurozone debt crisis, Credit Suisse will focus on generating capital. Its restructuring initiatives are also encouraging. We believe that such efforts would improve the company’s operating efficiency in the future.

Credit Suisse carries a Zacks Rank #4 (Sell). Among other foreign banks, UBS AG (UBS - Free Report) and Deutsche Bank AG (DB - Free Report) are expected to announce March-quarter end results on Apr 30, 2013, while Mitsubishi UFJ Financial Group, Inc. is anticipated to announce results on May 7, 2013.

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