By John Letzing
ZURICH-- Credit Suisse Group AG on Tuesday reported a sizable
loss for the second quarter, as the Swiss bank continues to absorb
the impact of a U.S. legal settlement reached two months ago
Zurich-based Credit Suisse reported a net loss of 700 million
Swiss francs ($779.44 million) for the period compared with a
year-earlier net profit of 1.05 billion francs. Analysts had
anticipated a loss of 670 million francs for the quarter. Net
revenue fell 6% to 6.43 billion francs, the bank said.
In May, Credit Suisse reached a settlement with U.S. authorities
probing into the bank's aiding of American tax evaders that
included an agreement to pay $2.6 billion. The bank said at the
time that it expected the settlement to shave about $1.8 billion
from its second-quarter profit.
Credit Suisse is making its way through a tumultuous time
because of the size and scope of its legal settlement, which took
many by surprise. In addition to penalties, the bank was forced to
plead guilty to the crime of aiding U.S. tax evasion. The plea
shouldn't affect operations, Credit Suisse has said, though it has
caused a hiccup in the bank's business of managing assets for U.S.
pension plans.
Credit Suisse is also weathering a period when many large
investment banking operations are suffering from a cyclical
downturn. It has scaled back some businesses and announced Tuesday
that it has exited commodities trading. But Credit Suisse still
retains a more significant presence in relatively higher-risk
investment banking areas than hometown rival UBS AG. Pretax profit
at the investment bank was 752 million francs in the second quarter
compared with 754 million francs in the same period last year,
Credit Suisse said.
Helvea analyst Tim Dawson called the bank's overall performance
in the quarter mixed, with the profitability of its wealth
management business falling "quite a bit below my estimate." While
the winding down of what's been a weak commodities trading business
may help, Mr. Dawson said, Credit Suisse still maintains too many
relatively small, lackluster areas of investment banking. "In a
quarter's time, they'll be pulling out of something else," the
analyst said.
Credit Suisse recently began reporting results for its business
lines, private banking & wealth management and investment
banking, in so-called "strategic" and "nonstrategic" units.
Nonstrategic units contain businesses Credit Suisse would like to
shed along with the costs associated with legal and regulatory
settlements.
Pretax profit for the strategic unit of its investment bank fell
11% to 1 billion francs, Credit Suisse said, as total strategic
sales and trading revenue fell 7%. In private banking & wealth
management, net new assets from wealth management clients were 7.4
billion francs, down slightly from 7.7 billion francs a year
earlier. Overall the private banking & wealth management
business posted a pretax profit of 882 million francs, while the
nonstrategic unit posted a loss of 1.63 billion francs.
During a briefing with reporters, Credit Suisse Chief Financial
Officer David Mathers said that after stripping out the impact of
the U.S. settlement on the quarter's performance, "our strategic
results were solid." Mr. Mathers said the bank is on track to cut
costs and rebalance following the settlement, though he declined to
speculate on a dividend level for this year. Mr. Mathers also
declined to comment on the job cuts related to the winding down of
commodities trading, though he suggested that related investment
banking businesses will also see reductions.
In his own remarks to reporters, Credit Suisse Chief Executive
Brady Dougan said it is impossible to know how much business the
bank lost as a result of its recent legal imbroglio in the U.S.
"There may be clients that didn't do business with us, that would
have," the CEO said. However, he noted that the relatively strong
inflows reported for private banking in the quarter suggest many
clients weren't scared away.
Mr. Dougan also revisited questions about his accountability for
the U.S. settlement. Those questions have been raised occasionally
in Swiss media since the deal was announced. "Sometimes I think
there's a disconnect" in the public's understanding of what
transpired at the bank, Mr. Dougan said, adding that "the current
senior management wasn't even here" during the period when Credit
Suisse was harboring hidden U.S. accounts.
In addition to cutting into the bank's profit figure, the U.S.
settlement also reduced Credit Suisse's capital ratio, a key
measure of financial stability that is closely watched by
regulators. The bank said at the time of the settlement that it
would shed risk-weighted assets and sell real estate to bring its
capital ratio back to 10% by the end of this year. Credit Suisse
said Tuesday that its capital ratio was 9.5% at the end of the
second quarter.
The outcome of a separate regulatory issue--recent probes into
the foreign exchange businesses at Credit Suisse and other
banks--remains unclear. Mr. Dougan said Tuesday that, "So far, we
don't see any material issues on our side," related to the probes,
adding, "It's not impossible there could be issues down the
road."
Apart from actions taken to address the recent reduction in its
capital ratio, Credit Suisse has generally sought to cut costs and
shed unwanted businesses of late. The bank has disposed of some
offshore Swiss private banking services for clients from selected
countries, and recently sold its domestic private banking operation
in Germany.
Like other Swiss banks, Credit Suisse has been pushed to
restructure its Swiss private banking business in the wake of legal
pressure from U.S. and European tax authorities. While money from
Western Europe has been trickling out in recent years as clients
declare their accounts to authorities back home, Credit Suisse has
been relying on emerging markets for growth.
On Tuesday, the bank said that trend continued in the second
quarter.
Write to John Letzing at john.letzing@wsj.com