Weak Trading Revenues Weigh Down Q1 Results For Credit Suisse

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Credit Suisse (NYSE:CS) reported worse-than-expected results for the first quarter on April 16, with a slump in its investment banking operations leading to a 12% reduction in net income for the Swiss banking giant compared to the same quarter last year. [1] The fact that the bank missed earnings expectations, despite having issued a warning last month about lower revenues for some of its business units, suggests that investors grossly underestimated the extent of the decline. That said, these results show the same trend that was evident in the recently detailed Q1 results for JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) – the reduction in top line figures can be attributed almost completely to poor trading revenues.

Otherwise, there was some good news from the Swiss bank. Credit Suisse’s cost-cutting efforts are having a clear impact on its results, as the bank reported total non-interest expenses of just above CHF 5 billion (~$5.7 billion) for the quarter, which makes it the second best quarter  in this regard (behind the marginally better Q2 2012) since the economic downturn of 2008. The bank’s cost-to-income ratio of 74% for the period was also better than what the bank achieved in any quarter over the last five years except for Q1 2013 (73.3%)

We maintain our $33 price estimate for Credit Suisse’s stock, which is slightly ahead of its current market price.

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See our complete analysis of Credit Suisse here

Investment Banking Operations Report Mixed Results

Credit Suisse’s investment banking operations roped in CHF 3.4 billion (~$3.9 billion) in revenues for the quarter. While this is a 28% improvement over the previous quarter, the figure is 13% lower than what the bank reported in Q1 2013. Given that revenues for the investment banking industry are cyclical, with a noticeable peak in the first quarter of the year, and factoring in the exceptionally poor debt trading activity over the second half of 2013 due to the Fed’s tapering plans, the Q1 2014 performance looks well below average.

There are a number of factors responsible for this noticeable trend in the industry, including investor concerns about the Fed pulling the plug on its asset purchase plan too quickly, as well as a slowdown in China and Germany affecting the global economy. The crisis in Ukraine towards the end of the period also had a negative impact on global markets and contributed to the sub-par Q1 results. Trading revenues took a clear hit – falling 18% year-on-year as debt trading revenues shrank a good 25% over the period.

Wealth Management Unit Fares Much Better

Credit Suisse’s cornerstone wealth management business reported a 24% improvement in pre-tax income quarter-on-quarter as well as a 27% growth compared to the year-ago period. While revenues across these three quarters were largely unchanged, the bottom line received a boost from the lower operating costs. Non-interest expenses fell below CHF 1.5 billion ($1.68 billion) for the first time since the economic downturn – allowing the bank to notch a cost-to-income ratio of 71.4% for the division this time around.

Quite notably, total assets under management for Credit Suisse’s wealth management arm crossed CHF 800 billion (~$910 billion) for the first time ever this quarter as the division benefited from strong inflows. Investors pumped in CHF 10.6 billion (~$12 billion) of net new assets in Q1 – the highest for a quarter since Q2 2011 – with clients in Switzerland and the Asia-Pacific region each responsible for roughly half of these inflows.

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Notes:
  1. First Quarter Results 2014, Credit Suisse Earnings Releases, Apr 16 2014 []