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Credit Suisse to Exit Commodities, Posts Big Quarter Loss

By Jeffrey Vögeli and Elena Logutenkova
July 22, 2014 7:29 AM EDT 18 Comments
An advertisement for Credit Suisse Group AG during a break in sessions at the Swiss International Finance Forum in Bern, Switzerland, on May 20, 2014.
Photographer: Philipp Schmidli/Bloomberg
An advertisement for Credit Suisse Group AG during a break in sessions at the Swiss International Finance Forum in Bern, Switzerland, on May 20, 2014.

Credit Suisse Group AG said it will abandon commodities trading as a $2.6 billion fine to settle a U.S. tax investigation pushed the Swiss bank to its biggest quarterly loss since 2008.

The bank’s net loss in the second quarter was 700 million Swiss francs ($779 million), compared with a profit of 1.05 billion francs a year earlier and a 691 million-franc estimate from analysts. Zurich-based Credit Suisse posted higher-than-forecast earnings at the investment bank and lower profit in wealth management even as it attracted more net new money from rich clients than analysts had estimated.

Chief Executive Officer Brady Dougan is reporting a second quarterly loss in less than a year as Credit Suisse grapples with regulatory probes. Analysts and investors have said Credit Suisse should step up efforts to shrink its investment bank and focus on wealth management to boost returns and shore up capital eroded by the U.S. fine. The bank reaffirmed plans to cut at least 4.5 billion francs in annual costs by the end of next year compared with 2011.

“The decision to exit commodities was probably taken mainly in the light of the capital weakness,” Dirk Becker, a Frankfurt-based analyst with Kepler Cheuvreux, said by phone. “The results in the quarter weren’t that bad, with investment banking surprising on the upside. The only really negative development was the drop in wealth management gross margin.”

The settlement in May for helping Americans evade taxes raised questions among investors about Credit Suisse’s financial strength as the ratio of capital to risk-weighted assets for the first quarter fell to the lowest among 16 global investment banks tracked by Bloomberg Intelligence. The bank wants to boost the ratio to more than 10 percent by the end of the year from 9.5 percent at the end of June.

Further Cuts

Credit Suisse shares fell as much as 2.7 percent today and were 1.5 percent lower at 25.71 francs at 1:06 p.m. in Zurich. Before today, the stock had dropped 4.3 percent this year, compared with a 2.9 percent decline for the Bloomberg Europe Banks and Financial Services Index.

Global investment banks are pulling back from commodities trading as regulations tighten and revenue slides. Deutsche Bank AG said in December that it would exit dedicated energy, agriculture, dry bulk and base metals trading. Barclays Plc said in April it would withdraw from most of its commodities activities. JPMorgan Chase & Co. agreed to sell its physical commodities unit to Mercuria Energy Group Ltd. for $3.5 billion in March.

Pretax profit at Credit Suisse’s investment bank was steady at 752 million francs, beating the 544 million-francs average estimate of six analysts surveyed by Bloomberg News. Revenue at the securities unit benefited from a 14 percent increase in fixed-income revenue to 1.43 billion francs and a 29 percent jump in equity underwriting to 268 million francs.

Wealth Decline

Wealth management posted a 8.4 percent decline in pretax profit to 569 million francs, as the gross margin in the business, which measures how much revenue it produces in relation to assets under management, dropped to 99 basis points from 104 basis points in the first quarter. A basis point is one hundredth of a percentage point. The unit attracted 7.4 billion francs in net new money, more than the 6.2 billion francs expected by analysts.

Earnings from corporate and institutional clients and in asset management fell 19 percent to 211 million francs and 23 percent to 102 million francs, respectively.

Commodities Exit

Credit Suisse cited low volatility and client volumes in its decision to exit commodities trading and said the move will cut costs about $75 million and lower risk-weighted assets and leverage exposure by $2 billion and $5 billion, respectively. The bank didn’t provide numbers for the revenue generated by the business or say how many jobs would be affected by the pullout.

Dougan said the commodities trading business was loss-making so far this year. Credit Suisse may keep small parts of the business, such as precious metals, and move them to the foreign exchange unit, he said. The bank is keeping its commodity trade finance business, which is part of the corporate and institutional clients division.

Commodities revenue at the 10 largest banks fell 18 percent last year amid reduced volatility, London-based analytics company Coalition Ltd. said in February. The Bloomberg Commodity Index of 22 raw materials had its third consecutive annual drop in 2013 as gold fell the most since 1981 and corn, arabica coffee and wheat slid at least 20 percent.

Electronic Trading

Credit Suisse is also cutting expenses at its foreign exchange and rates businesses by shifting more of those trades to its electronic platform, Chief Financial Officer David Mathers said on a conference call with journalists today.

The reorganization of the macro unit, which includes commodities, foreign exchange and rates businesses, will yield about $200 million in cost savings and reductions of $8 billion in risk-weighted assets and $25 billion in leverage exposure, Credit Suisse said.

“It’s certainly fair to say that all three areas face very adverse market conditions and to varying degrees they face regulatory and market structural changes,” Mathers said. “It’s really a package of measures intended to significantly improve the returns in the macro business.”

Cutting Assets

Credit Suisse aims to cut Basel III risk-weighted assets to about 250 billion francs in the long term from 279 billion francs at the end of the second quarter.

U.S. banks posted better results than expected earlier this month because of higher-than-expected debt trading revenue. All asset classes within fixed income stabilized or improved in June compared to April and May, JPMorgan analysts Kian Abouhossein and Amit Ranjan said in a report last week. The results of the U.S. banks are a “positive read” for European investment banks, they said.

Credit Suisse is the first European bank with large securities business to report second-quarter earnings. UBS AG and Deutsche Bank AG are due to report earnings on July 29, followed by Barclays Plc a day later.

JPMorgan, Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley reported a 2.5 percent decline in cumulative revenue at their investment banks in the quarter from the year-earlier period, excluding valuation adjustments, data compiled by Bloomberg Industries show. Revenue was helped by gains in equity underwriting and advising on mergers.

Credit Suisse took a charge of 1.6 billion francs in the quarter after it became the first global bank in 10 years to plead guilty to a crime in a U.S. courtroom. The bank last posted a loss for the fourth quarter of 2013, amounting to 476 million francs, after booking charges for settling lawsuits over mortgages sold to Fannie Mae and Freddie Mac and increasing provisions for the U.S. tax case.

To contact the reporters on this story: Jeffrey Vögeli in Zurich at jvogeli@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Cindy Roberts, Simone Meier

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