Credit Suisse tumbles to a loss
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Credit Suisse tumbles to a loss

A surprise for some as Credit Suisse posts a loss, after adhering to regulatory capital requirements and paring down risk-weighted assets

Credit Suisse has revealed it tumbled to a SFr637 million loss in the fourth quarter 2011. Its report states:

- Credit Suisse Group reports 4Q11 net loss attributable to shareholders of CHF637 million, Core Results pre-tax loss of CHF998 million, Core Results net revenues of CHF4,473 million; diluted loss per share of CHF0.62, net new assets of CHF0.4 billion

- 4Q11 pre-tax loss includes negative impacts of an aggregate CHF981 million consisting of realignment costs of CHF414 million from cost-efficiency measures, and CHF567 million from businesses we are exiting and the reduction of risk-weighted assets in our Investment Banking fixed income business.

- Investment Banking reported net revenues of CHF1,251 million and a pre-tax loss of CHF1,305 million; results were impacted by a difficult trading environment and the above mentioned losses incurred from exiting businesses as well as from the reduction of Basel III risk-weighted assets in the quarter; client franchise across businesses remained strong despite continued subdued client activity levels

To some it has come as a surprise, considering Credit Suisse posted net profit of SFr841 million the previous year.

However, interestingly, the main reasons given for the loss stem from actions enforced by new regulatory and capital requirements to make banks"safer" but which in fact – as many experts have told Euromoney – push down profitability and therefore threaten the survival of some entities:

Continued strong capitalization and funding position:
- Basel 2.5 tier 1 ratio increased by 0.9 percentage points to 15.2%
- Basel 2.5 core tier 1 ratio increased by 0.7 percentage points to 10.7%
- Net stable funding ratio further improved to 98%

Risk-weighted assets (RWA) reduction:

Well ahead of schedule on implementation of Basel III RWA reduction programme; previously announced end-2012 RWA reduction target of CHF80 billion to be achieved nine months early, by end of 1Q12; reduced Basel III RWA in Investment Banking by CHF35 billion in 4Q11

In fact, the numbers neatly fit into many market participants' assumptions that reduction in risk-weighted assets, higher capital requirements and funding positions are duly aimed at stabilising the fraught global banking system. However, the cost to the banks, on top of many other regulatory changes, will hold back economic growth until 2016:

Global financial regulatory reforms will prevent economic recovery until at least 2016 as bank lending rates rise and cost jobs, while long-term net debt funding for banks will increase to $1.5 trillion by 2020, says the Institute of International Finance (IIF) in a report.

The IIF study, titled 'The cumulative impact on the global economy of changes in the financial regulatory framework', estimates that banks in the leading industrial economies will require additional capital of $1.3 trillion by 2015. This could push bank lending rates up by over 3.5 percentage points on average for the next five years.

However, Brady Dougan, chief executive officer of Credit Suisse, said in a statement

“Our performance for the fourth quarter 2011 was disappointing. It reflects both the adverse market conditions during the period and the impact of the measures we have taken to swiftly adapt our business to the evolving market and regulatory requirements.

“In mid-2011, we decided to aggressively reduce risks and costs. This decision was rooted in our belief that the market and regulatory environment is undergoing fundamental change, and that by embracing these developments and proactively adjusting our business model, we can position Credit Suisse to succeed in the new environment. The regulatory developments and the subdued market environment in the second half of 2011 have confirmed our views. The accelerated implementation of the risk reduction plan and our measures to exit businesses that are no longer expected to deliver attractive returns in the changed regulatory environment, as well as higher charges incurred due to the rapid execution of the cost reduction programmes, led to negative impact of CHF981 million in the fourth quarter of 2011. We are taking these steps to reduce risk and deploy our balance sheet to our client-focused growth businesses, which offer attractive returns in the new environment. This will position us well to achieve superior returns to the benefit of our clients and shareholders.

“While we are mindful that the market and economic environment remain uncertain, we are encouraged that our business is off to a good start with year-to-date underlying* return on equity consistent with our target level of 15%, including the benefit from our risk and cost-reduction plans. We have accelerated the reduction of risk-weighted assets and expect to reach the risk-weighted assets level originally targeted for the end of 2012 by the end of the first quarter 2012. Furthermore, we are on track with our CHF2.0 billion cost-reduction programme, which is to be completed by year-end 2013, and expect our results and costs, excluding the costs from PAF2, to reflect the annualized reduction in our cost base of CHF1.2 billion beginning in the first quarter 2012.”

Apart from the reduction in risk-weighted assets, there were some bright spots that Euromoney noticed - private banking remained profitable:

- Private banking results marked by an ongoing low-interest-rate environment, significantly lower levels of client activity and higher expenses for legal matters and credit provisions, driven by isolated cases in both wealth management clients and corporate & institutional clients; 4Q11 net revenues of CHF2,574 million, pre-tax income of CHF467 million, net new assets of CHF7.6 billion, mainly from emerging markets and the ultra-high-net-worth individual client segment as well as from corporate & institutional clients in Switzerland

Credit Suisse retained its position as the world’s leading private bank for a third consecutive year, according to Euromoney’s benchmark Global Private Banking Survey:

Credit Suisse again beat its Swiss rival UBS into second place. HSBC remained third overall in the global rankings, in which JPMorgan overtook Citi to take fourth place.

For the full results from Euromoney’s benchmark Global Private Banking Survey, click here
- Euromoney Skew Blog

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