CS Credit Suisse Group

By John Letzing 

ZURICH -- Credit Suisse Group AG reported a surprise profit for the third quarter, as it curbed expenses and sold a historic building, though investors were discouraged by challenges the Swiss bank continues to face amid its ongoing overhaul.

Zurich-based Credit Suisse said Thursday its net profit in the quarter was 41 million Swiss francs ($42.1 million), compared with 779 million francs in the same period last year. Net revenue fell 10%, to 5.4 billion francs. Analysts had expected a net loss of 174 million francs and revenue of 5.1 billion francs.

Investors, however, sent the bank's shares down 6.6%. Morgan Stanley analysts zeroed in on Credit Suisse's 0.4% return on tangible equity in the quarter. The profitability measure suggests the bank still has a "long way to go," they wrote in a research note.

Daniel Regli, a MainFirst analyst, noted that Credit Suisse's results follow a series of upbeat reports from rivals, which raised the bar. "Most of the banks were able to surprise positively, so I think the market already assumed Credit Suisse would follow," he said. In particular, Credit Suisse's investment-bank trading result likely fell short of expectations, the analyst added.

Credit Suisse Chief Executive Tidjane Thiam had his own explanation for the stock drop: Investors who have bought in as the shares gained value in recent months are using the quarterly results as a reason to sell. "This is profit-taking," he said. The bank's results, Mr. Thiam added, were "undeniably good."

Credit Suisse began a broad strategic shift under Mr. Thiam to limit investment banking and focus more on its wealth-management businesses roughly one year ago, just as markets were souring and clients began to hold back on investments and trades that can generate fees for the bank. Meanwhile, low and negative interest rates have continued to curb revenue growth for the banking industry more generally, forcing lenders to rely on cost cuts rather than sales increases.

Credit Suisse said Thursday it will likely suffer from markets that are undercut by geopolitical and economic uncertainty for "the next several quarters."

Total operating expenses rose 2% in the third quarter compared with the same period last year, Credit Suisse said, as the bank incurred costs tied to its restructuring. On an adjusted basis, its operating-cost base fell 2%. General and administrative expenses fell 6%, the bank said, while commission expenses declined 23%.

Credit Suisse said it has now cut 5,400 jobs, including contractors, of the 6,000 planned as part of its restructuring. Overall head count in the quarter fell 1% compared with the same period last year, the bank said.

Analysts have expressed doubts about the bank's ability to comfortably maintain its capital cushion, and have speculated about a possible need for another capital raising. Credit Suisse raised 6 billion francs in capital last year, shortly after Mr. Thiam took over as CEO.

The bank said on Thursday that its key capital ratio stood at 12% in the third quarter, up from 10.2% in the same period last year. The most recent figure was helped by a gain of 346 million francs tied to the sale of real estate, Credit Suisse said.

The gain resulted from the sale in August of a historic building near Credit Suisse's headquarters on central Zurich's Bahnhofstrasse -- one of several real-estate divestments made in recent years, as the bank seeks to slim down.

Credit Suisse's Switzerland-based unit reported a 90% gain in pretax profit in the quarter compared with a year earlier, to 758 million francs, as net revenue rose 22%. The result was helped by gains from the real-estate sale and a 5% decline in operating expenses.

As Credit Suisse has come to rely more on its wealth-management operations, it has also actively flushed some assets out by pressing clients to disclose undeclared funds to their local tax authorities and pay related taxes and penalties. Partly as a result of that exercise, net new assets for the Swiss unit's private-banking division fell sharply, to 200 million francs from 3.1 billion francs in the period last year.

Pretax profit for Credit Suisse's business in Asia fell 6% in the quarter compared with the period last year, to 152 million francs. The unit, which is a focus for Credit Suisse's intended growth in wealth management and has been bulking up on private bankers, received 4.6 billion francs in net new assets in the quarter, compared with 3.7 billion francs in the period last year.

Credit Suisse's International Wealth Management unit reported a 24% increase in pretax profit in the quarter compared with the same period last year, even as net revenue fell 1%.

As Credit Suisse shifts focus away from its investment bank, it has tried to sell unwanted investment-bank assets via a so-called strategic resolution unit. The unit shed $3 billion in risk-weighted assets in the quarter -- marking an overall $20.3 billion reduction, to $54.9 billion, since the same period last year. The unit posted a quarterly pretax loss of 852 million francs.

The Global Markets unit, Credit Suisse's investment-bank trading business that accumulated about $1 billion in unexpected losses disclosed earlier this year, reported pretax profit of 87 million francs for the third quarter, down 67% from the same quarter last year. Net revenue from debt trading rose 3% compared with the same quarter last year, while equities revenue fell 38%.

Write to John Letzing at john.letzing@wsj.com

(END) Dow Jones Newswires

November 04, 2016 02:47 ET (06:47 GMT)

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