(Bloomberg Gadfly) -- Credit Suisse AG's first-quarter results have given CEO Tidjane Thiam ammunition against activists calling for more radical surgery. Despite a fairly weak quarter for the investment bank, the CEO's focus on wealth management while cutting costs and dumping unwanted assets is paying off. The shares rose 4 percent in response. Profitability is still below target, though. This isn't the finish line.
Credit Suisse's bid to follow in the footsteps of arch-rival UBS Group AG by shrinking its trading arm and going big on wealth hasn't exactly been smooth sailing of late. The bank reported its third straight loss last year, and was forced to tap investors for fresh capital to help fund its overhaul. With the promise of share buybacks a distant one, the bank has faced calls from activist RBR Capital to break itself up for quicker results.
Judging by the Swiss bank's latest earnings release, there's little reason to think such calls will gain traction. Overall group revenues hit their highest quarterly level for years, while operating expenses fell to their lowest in years -- a lucrative combination that bankers call "operating leverage." The bank is slimmer, with less headcount and a smaller balance sheet. Wealth management is drawing in new money and doing better at wringing fees and trades from clients.
The investment bank wasn't a star performer in the first quarter, to be sure, but shareholders will take heart that operating costs and balance-sheet size are on the way down. There's no sign either that ripping the investment banking business out wholesale would be any good for the brand. Credit Suisse was careful to highlight the benefits of cross-selling, as investment bankers and private bankers pitch to the same clients. In Asia, a key territory for Thiam's expansion, revenues and pretax profits at both wealth management and markets trading were up year-on-year.
Where things get a bit murky is future profitability. As tempting a turnaround story as Credit Suisse may be, it's still a work in progress. Return on tangible equity was 7.6 percent, certainly better than the last couple of years, but well short of the 10 to 11 percent the bank is targeting for 2019. Costs are still eating up about 80 percent of revenue. No doubt this will be improved once Thiam has finished cutting its pile of unwanted assets, but that's about a year away.
Credit Suisse aspires to a UBS-style premium valuation, but its business doesn’t deserve it yet. As disappointing as UBS's own first-quarter results were, it is already delivering share buybacks after reporting a return on tangible equity of about 13.6 percent -- almost double the level at Thiam's bank.
Credit Suisse shares trade at book value, slightly below the peer-group average, and should close that gap. But more is needed. The job isn't done.
Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.
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