(Bloomberg Opinion) -- For a bank that has tried so hard to shed its “Wall Street” image back home, Switzerland’s Credit Suisse Group AG is still hugely reliant on its trading arm. Its first set of earnings since the Covid-19 lockdown is a reminder of just how volatile the securities and lending business can be.
Chief Executive Officer Thomas Gottstein, in the job for just two months, has had a baptism of fire, he told Bloomberg Television on Thursday. As entire continents shut their economies in the first quarter of 2020 and markets gyrated wildly, the Swiss giant suffered its biggest hit from loan provisions and markdowns in more than a decade. They totaled more than $1 billion. Trading revenue was higher as institutional and wealthy clients bought and sold more securities, helping to cushion the blow, but Gottstein can’t count on that being repeated.
In the equities and fixed-income units, trading revenue jumped by 25% to $2.2 billion, beating analyst expectations. That’s even after the firm lost $182 million, mainly on a single-name counterparty. While private clients are now keeping almost one-third of their assets in cash, transaction revenue soared 31% in the period, when compared to the same quarter last year. It’s hard to imagine that this is sustainable. Some American peers have warned on the outlook; Gottstein told Bloomberg TV that his bank’s trading volumes were still decent but have fallen a little.
Showing how risky trading has become, the firm’s value-at-risk — its assessment of the most it could lose on one day — jumped to $103 million at the end of the quarter from an average of $27 million at the end of 2019.
Meantime, the credit outlook is — to put it mildly — uncertain. Credit Suisse set aside 376 million Swiss francs ($386 million) to cover potential losses in its loan book. Unlike its European peers, the bank reports under U.S. GAAP accounting standards, and the level of provisioning is in line with Wall Street’s firms, it said. Its assumption of a 20% second-quarter contraction in U.S. gross domestic product — and a recession in Europe, the U.S. and Switzerland this year, with a 2% to 3% recovery in global GDP in 2021 — is probably as good a guess as any.
And yet this isn’t just about the broader market. Credit Suisse’s own book warrants a closer look too. Though the firm has cut back its exposure to the oil and gas industry to $7.7 billion, of which just over a third is junk-rated debt, its quarterly credit losses stemmed mostly from the oil industry. And that was before this week’s wild dip below zero for WTI prices.
Even more painful were the unrealized mark-to-market losses of 284 million Swiss francs in leveraged finance and 160 million Swiss francs in Asia-Pacific lending. Asked why a bank that has pivoted to wealth management is still so ensconced in higher yielding but riskier lending, Gottstein was categorical: At $7.3 billion, he said, the bank’s leveraged finance exposure is 85% lower than at its peak, but the business remains critical to the firm’s profitability. Private equity continues to dominate investment banking activity and clients are now starting discussions about taking businesses private, he added.
And in a reminder of how lending to wealthy clients can backfire, the company’s biggest loss in Asia was on Luckin Coffee Inc., which collapsed amid an accounting scandal. Credit Suisse was one of the biggest creditors on defaulted loans to Luckin’s founder.
All told, however, it wasn’t such a bad quarter for the Swiss bank. It posted 1.3 billion Swiss francs in net profit, in part thanks to a negative tax rate, and it’s sticking with a target for a return on tangible equity of 10% — while acknowledging that meeting the goal will be difficult.
Like everybody else, the fortunes of Credit Suisse will depend on how quickly and effectively the world’s economies emerge from the Covid-19 lockdowns. “Does it take much imagination if the current environment persists that we see those profits disappear and Credit Suisse turn loss-making,” asked one analyst on Thursday’s conference call. Gottstein replied that he has no trouble sleeping but a second wave of coronavirus infections would be the worst scenario. Investors will have to wait a bit longer for any kind of certainty.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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