Credit Suisse’s Capital Ratio Shrinks In Q1 Despite Strong Operating Performance

Investors were not thrilled with the Q1 performance figures that Credit Suisse (NYSE:CS) reported on Tuesday, April 21. ^[1] Although the Swiss bank posted better-than-expected results for the first quarter of the year, there were some unfavorable trends underlying these figures. The biggest source of concern for investors was the marginal reduction in the bank’s common equity tier 1 (CET1) capital ratio from 10.1% at the end of 2014 to 10% at the end of Q1 2015. The resulting capital shortfall may force Credit Suisse to issue more equity over coming months. Also, the fact that the bank reported its lowest advisory and underwriting fee revenues in more than three years indicated that it was losing market share in the less volatile aspects of the investment banking business. To add to Credit Suisse’s woes, the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc also negatively impacted operating margins across divisions this quarter. All these factors resulted in the bank’s shares losing almost 2% of their value over trading on Tuesday.

That said, the bank churned out one of its best trading performance in recent years, and its cornerstone wealth management business continues to benefit from strong inflows of cash in the Asia Pacific region. We stick to our $27 price estimate for Credit Suisse’s, which is slightly ahead of the current market price.

See our complete analysis of Credit Suisse here

Trading Revenues Boost The Top Line, But Margins Remain A Problem

Credit Suisse has drawn a lot of criticism from investors over recent years for its decision to maintain a full-fledged investment bank despite its capital-intensive nature. Its larger rival UBS (NYSE:UBS) has shrunk its debt-trading business considerably over recent years and now has an investment bank which is around one-third the size of Credit Suisse’s operations. This has only added more pressure on the latter’s management to justify its support for the current business model. The strong revenue figure for this quarter helped their stand to a good extent. Credit Suisse reported total trading revenues in excess of CHF 3 billion ($3.15 billion) for the first time since Q1 2013, with the equities trading desk posting its best performance in four years and the debt trading desk gaining from the increased activity level for the period. While debt trading revenues jumped 13% year-on-year, equity trading revenues edged 15% higher.

On the flip side, however, the bank’s advisory and underwriting fees made just CHF 617 million ($650 million) in Q1 2015 – the lowest for a quarter since the particularly dismal Q4 2011. This represents a 26% reduction year-on-year and an 18% decline quarter-on-quarter – in sharp contrast to the gains all U.S. investment banking giants have reported for the period on the back of strong M&A activity. Also, Credit Suisse’s pre-tax operating margin of 26.4% for its investment banking operations was well below the 30%+ margin figure reported by most of its peers.

Wealth Management Saw Decent Performance Despite Headwinds

Credit Suisse’s cornerstone wealth management business had a mixed quarter, as the sharp currency movements hurt results on two fronts. Firstly, the stronger Swiss franc had a negative impact on the bank’s total asset base. Total assets under management fell from CHF 874.5 billion at the end of Q4 2014 to CHF 861.2 billion at the end of Q1 2015 despite net inflows of CHF 7 and strong market-related appreciation over the period. Secondly, the revenues generated outside Switzerland were also subject to negative exchange rate movements, because of which total wealth management revenues fell 2% compared to the previous quarter.

The division saw inflows of new cash in Switzerland (CHF 1.7 billion), the Americas (CHF 2.3 billion) as well as the Asia Pacific region (CHF 4.6 billion), while there was a net outflow of cash from the EMEA region (CHF 1.6 billion).

Credit Suisse did very well on the cost front, though, as is evident from the fact that its wealth management operations reported a pre-tax profit figure of CHF 636 million ($670 million) for the quarter – the highest since early 2010. Notably, the pre-tax margin figure of 30.1% for the unit is the highest in at least five years. The bank has been able to cut its annual recurring costs by roughly CHF 3.6 billion since its expense reduction program kicked off in 2011, and these savings are expected to reach up to CHF 4.25 billion by the end of this year.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. First-Quarter 2015 Results, Credit Suisse Investor News, Apr 21 2015 [↩]