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Enhanced Cred

12 February 2015 By Dominic Elliott

For once, Credit Suisse is on the front foot. Shares in the Swiss bank surged more than 9 percent on Feb. 12 after it kept its full-year dividend intact and revealed reassuringly robust fourth-quarter results. Better still, in outlining up to another 70 billion Swiss francs ($75 billion) in asset cuts this year, Chief Executive Brady Dougan is adopting a more proactive approach to tackling his bloated balance sheet.

Credit Suisse’s two main divisions are delivering for the first time in a while. In the investment bank, fourth-quarter fixed income revenue rose 7 percent year-on-year, versus an average 25 percent-plus decline on Wall Street, and continuing demand for high-yielding securitised products played to one of Credit Suisse’s core strengths. In wealth management, the underlying gross margin may have declined by two basis points to 95 bps in the fourth quarter, but that was better than at cross-town rival UBS, where it slipped four bps to 82 bps.

The bank still faces fallout from the rising Swiss franc, following the Swiss National Bank’s shock abandonment of its peg last month. But by indentifying a further 200 million Swiss francs in cost savings, Credit Suisse reckons it can get away with a drop of about 3 percent in 2015 pretax profit.

Operational strength means Dougan can grapple with another problem: capital. Leverage exposure fell 51 billion Swiss francs in the fourth quarter alone. Yet Credit Suisse still only achieved a 2.4 percent ratio of common equity to gross assets, which explains why Dougan has ramped up the bank’s crash diet, taking total balance-sheet reduction to 230 billion Swiss francs over 2015.

He should do more. Even with the extra asset surgery announced on Feb. 12, Credit Suisse reckons it will only reach a 3 percent threshold by the end of this year. Few banks are weaker on that metric, and it could get increasingly hard to shrink with rivals scrambling to do the same. Credit Suisse trades at 0.7 times its expected book value for 2015, against UBS’s 1.1 times. The more Dougan can keep things ticking along as he slashes assets, the more that gap might close.


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