Safety first approach profits Credit Suisse

Things are looking up at Switzerland's largest bank Keystone

Credit Suisse heralded its own conservative strategy after the bank cemented its position of strength with a second quarter SFr1.57 billion ($1.47 billion) profit.

Analysts praised the expectation-busting performance after previously expressing doubts over the sustainability of huge recent returns generated by United States rivals Goldman Sachs and JP Morgan.

The results announced on Thursday follow a first-quarter windfall of SFr2 billion, placing Credit Suisse’s profit for the first half of 2009 at SFr3.57 billion. The bank had posted a record loss of SFr8.2 billion in 2008.

Chief executive Brady Dougan was at pains to point out that the profits had been gained at the same time as the bank had reduced its exposure to risky assets and exited potentially shaky markets. He told the media in Zurich on Thursday that Credit Suisse had foreseen a dramatic shift in market behaviour.

“The events of the last couple of years have led to significant changes in our industry, and we believe this change will endure,” he said. “We believe clients, investors and regulators will behave differently over the medium to long-term. We think that they will continue to have a more conservative stance.”

“Our view appears to be in contrast to some who believe that the industry will go back to the old ways,” he added. “We do not agree with this and have adopted our business model accordingly.”

His comments could not fail to draw comparison to Goldman Sachs, which posted a record $3.44 billion (SFr3.68 billion) second quarter net profit last week.

Sceptical analysts

Many analysts were sceptical that Goldman’s bumper yield, which took advantage of rivals’ weaknesses and short-term gaps in the market, could last in the long run.

However, analysts appeared more confident that Credit Suisse could hold on to its advantage in the coming quarters.

“When you look at the headline number it may not look so appealing in the light of the results of the like of Goldman Sachs,” said Fox-Pitt, Kelton analyst David Williams. “But if you do a bit of digging the numbers are good. They are making a strong performance, they have a fantastic capital base and they are gaining market share.”

The bank earned such positive comments by reducing its risky assets by ten per cent in the last quarter and increasing the amount of reserves it has at its disposal to cover potential liabilities. Dougan said the measures would result in decreased volatility and that would make the bank more attractive to clients and investors in the long-term.

In addition, the second quarter results were hit by one-off charges of SFr1.6 billion, offset by tax gains, implying that the underlying business was better than final figures suggested.

Credit Suisse made some profit in the same trading areas as Goldman Sachs, as evidenced by the SFr1.7 billion pre-tax income in investment banking. But its private banking division also netted an extra SFr10.7 billion of new client money in the quarter while asset management returned to profitability with a SFr55 million return.

“Superior return”

“This is a superior return in an industry where many players have returned to profitability but few are generating strong returns on capital,” Dougan said on Thursday.

“Our strong second-quarter performance demonstrates that our client-focused, capital-efficient strategy is working very well and that our reduced-risk business model is providing the basis for more sustainable, high-quality, lower volatility earnings,” he added.

Dougan warned that volatile business conditions were likely to persist in the coming months but believed that Credit Suisse was well positioned to absorb future shocks.

Shares shot up five per cent early in the morning and recorded a daily increase of 5.8 per cent per cent at the close of trading in Zurich.

Rival Swiss bank UBS will report its second quarter results on August 4 but has already warned the market to expect a loss.

Matthew Allen, swissinfo.ch and agencies

Credit Suisse dates

Oct. 13, 2008 – Israeli holding company Koor Industries invests SFr1.2 billion in Credit Suisse in exchange for a three percent stake in the bank.

Oct. 16, 2008 – Credit Suisse raises about SFr10 billion, or about 12 percent of its outstanding equity, from private investors. The Qatar Investment Company increases its stake in Credit Suisse to 8.9 percent, while Saudi conglomerate Olayan increases its stake to 3.6 percent.

Dec. 4, 2008 – Credit Suisse announces plans to cut 11 percent of its workforce, or 5,300 jobs, as it reveals it made a loss of SFr3 billion in October and November.

Feb. 11, 2009 – Credit Suisse reports a net loss for 2008 of SFr8.2 billion, its biggest-ever annual loss.

March 9, 2009 – Credit Suisse names Hans-Ulrich Doerig as new chairman. Doerig replaces Walter B. Kielholz.

April 23, 2009 – Credit Suisse reports a first-quarter net profit of SFr2 billion.

June 23, 2009 – Credit Suisse agrees to pay $316 million to settle a legal battle over the collapse of a $6.5 billion buyout of chemical company Huntsman.

July 1, 2009 – Bank finalises sale of part of its traditional asset management business to Aberdeen Asset Management. The bank now holds 29 percent of Aberdeen.