Credit Suisse Announces Another Round Of Reorganization After Poor Q3 Showing

Credit Suisse (NYSE:CS) reported a rather poor performance for the third quarter of the year late last week, with its focus on growing its FICC trading business in recent years leading to a sharp decline in the top line in a period that saw a poor demand for debt trading. ^[1] The second-largest Swiss bank’s revenues tanked nearly 20% compared to the first two quarters of the year – resulting in a sharp 40% fall in earnings quarter-on-quarter.

Having undertaken a large-scale reorganization in late 2011 to meet stringent capital requirements imposed by Swiss regulators, the bank spent the whole of 2012 cutting down on non-core businesses and trimming expenses, and finally broke the string of poor results with two strong quarterly performances earlier this year (see Credit Suisse Posts Strong Q2 Figures As Income Rises Across Businesses). But with things not going its way in Q3, Credit Suisse has decided to listen to investor concerns that its business model leans too heavily on its FICC trading business, by detailing plans to restructure its interest rates business. The bank will also consolidate non-core units that are a part of each of its business segments as a separate “non-strategic unit” under the respective segment. The proposed changes are likely to save the bank an additional CHF 100 million ($111 million) annually – raising the bank’s target for total annual expense reduction by 2015 to above CHF 4.5 billion ($5 billion).

While Credit Suisse’s performance for the quarter was subpar, we believe that the changes proposed by the bank mitigate its negative impact. Accordingly, we maintain our $32 price estimate for Credit Suisse’s stock, which is around the current market price.

See our complete analysis of Credit Suisse here

Fixed-Income Desk Hit By Slowing Global Conditions

Credit Suisse’s investment banking operations roped in CHF 2.55 billion ($2.8 billion) this quarter – 25% lower than the figure for the previous quarter and 20% below that for the same quarter last year. There was a notable quarter-on-quarter decline across all the operating units under the investment banking division – underwriting, advisory as well as fixed-income and equities trading. The fixed-income desk was hit the hardest, with revenues shrinking by a third compared to the previous quarter to a figure of CHF 833 million ($930 million) – the lowest since Q4 2011.

Equities trading brought in a healthy CHF 1.1 billion ($1.2 billion) this quarter, but that did not help the top line much, given that the unit generated CHF 1.3 billion ($1.5 billion) in the previous quarter.

Quite notably, the quarter witnessed a marginal increase in Credit Suisse’s average 98% value at risk (VaR) figure for the first time since early 2010 – inching higher from CHF 40 million ($45 million) for the first two quarters of the year to CHF 41 million ($46 million) in Q3 . The change came from a marked reduction in the benefit Credit Suisse’s trading portfolio enjoyed due to its diversification – indicating that steps to refocus its trading operations may already be underway.

Expense Reductions Rescue Wealth Management Results

Credit Suisse’s cornerstone wealth management business roped in considerably lower revenues compared to the previous quarter, due to a sharp decline in transaction- and performance-based fees. These fees fell from CHF 728 million (~$810 million) last quarter to CHF 566 million (~$630 million) this time around – a 22% reduction, which can be traced back to the fall in the size of its asset base by CHF 11.6 billion ($12.9 billion) from unfavorable exchange rate movements. The bank actually added net new assets of CHF 3.2 billion ($3.6 billion) over the quarter, with strong inflows from Asia-Pacific and the Americas more than making up for outflows in Switzerland and Europe.

Fortunately, the impact of the falling revenues on the bottom line was mitigated due to the cost-cutting measures the division has undergone over recent months. Total operating expenses fell a good 10% compared to the figure for the previous quarter to settle at CHF 1.6 billion ($1.8 billion). With the bank recently announcing plans to exit or scale down its presence in as many as 50 peripheral markets (see Credit Suisse Continues To Shake Up Private Banking Business), cost benefits will continue to accrue over subsequent quarters, helping margins further in the future.

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1. Third Quarter 2013 Results, Credit Suisse Website, Oct 24 2013 [↩]