Credit Suisse Flags Loss Next Quarter to Cap Year to Forget
(Bloomberg) -- Credit Suisse Group AG said it will post a net loss in the fourth quarter on the back of a 1.6 billion-franc ($1.8 billion) impairment tied to its restructuring, as charges and legal fees accompany its efforts to reboot strategy in the wake of a string of scandals.
Third-quarter net income dropped 21%, hit by 564 million ($620 million) of litigation costs from a variety of issues including a fund-raising scandal in Mozambique and the implosion of Greensill Capital. A move to shrink the investment bank by 25% will cause the impairment this quarter as the firm leans further into wealth management.
Credit Suisse shares erased gains after the open on Thursday, down 1.5% at 9:13 a.m. in Zurich. The stock is down almost 13% this year.
Chief Executive Officer Thomas Gottstein has been looking to prove that major blunders in the trading and asset management divisions haven’t eroded the strength of the firm’s other profit drivers. The bank on Thursday provided a strategic update that boosts the profitable wealth unit and dials back risk from the investment bank.
“Wealth Management businesses returned to robust net new assets and higher transaction revenues sequentially, while recurring commissions & fees and client business volumes demonstrated strong year on year momentum,” Gottstein said in the earnings release on Thursday.
The bank’s strategy came after a six-month review by new Chairman Antonio Horta-Osorio following a series of costly errors, including losing $5.5 billion in the blowup of family office Archegos Capital Management and having to unwind client funds that were managed with collapsed lender Greensill Capital.
Revenue rose in the third quarter, helped by deal-making fees that almost tripled from a year earlier amid a merger boom. The lender’s wealth business recorded net new assets of 6.5 billion francs, led by the Asia Pacific region.
A further impairment of 113 million francs was recorded for the third quarter in the asset management unit related to its investment in York Capital Management. The Swiss bank took a 30% stake in the U.S. investment firm in 2000, and already booked a $450 million impairment last year as the company wound down most of its hedge-fund strategies. As part of the strategy reboot the bank plans to exit other similar investments.
What Bloomberg Intelligence Says:
“Credit Suisse’s prime-brokerage exit and other investment-bank cuts -- alongside an increased capital allocation by about 25% to the core global wealth franchise by 2024 -- should enhance structural profitability for the bank with potentially less volatility and risk.”
-- Alison Williams, BI banking analyst
Click here to read the research.
The international wealth division experienced 1.4 billion francs in net inflows, while the Asia and Swiss wealth units delivered 3.2 billion francs, and 1.9 billion francs in net inflows.
By comparison, UBS Group AG reported almost $19 billion of net new fee-generating assets in its wealth business.
The firm’s second-quarter results had prompted investor concern that its issues were weighing on the key wealth business, as it saw outflows across several units. The three wealth business will now be combined in a single unit following the strategy review.
At the investment bank, Credit Suisse assuaged investors with earnings from capital markets and advisory fees that kept pace with the biggest Wall Street peers. Advisory revenues were up 182% from last year’s third quarter, posting the best quarterly performance since 2018 driven by strong M&A fees.
Fixed income trading revenues fell 13%, in line with U.S. and European competitors. Equities trading revenues were down 9% as the bank exits the prime brokerage business following the Archegos blowup.
The results may not fully defuse investor worries over a wave of defections among senior deal-makers. Compensation accrual was down 8% this quarter, the third decline in a row. Advisory fees tend to be recognized when deals are completed, meaning a lag in when league table results affect revenue. Among announced mergers and acquisitions globally, Credit Suisse has fallen to ninth so far this year, after placing sixth in 2020 and seventh in 2019.
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