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25 April 2012 By Peter Thal Larsen

Credit Suisse is still shrinking. The Swiss bank returned to the black in the first quarter, even though revenue was well below the same period of 2011. Cost-cutting helped, and balance-sheet contraction boosted returns. But the bank has more to do to meet tough capital targets. Choppy markets won’t help.

After a painful fourth quarter, earnings of just 44 million Swiss francs for the first three months of the year don’t look like much of a recovery. But strip away the perverse write-down triggered by the rally in the bank’s debt, and the one-off charge from distributing unwanted balance-sheet assets to staff, and Credit Suisse earned 1.36 billion Swiss francs in the quarter. That translates into a respectable 15.9 percent return on equity.

The big question is whether that performance can be sustained. Though the investment bank pulled out of its year-end slump, revenue from fixed income, equities and underwriting and advising on M&A deals were all down from the first quarter of last year. The good news is that the capital base that generated that revenue shrank even more. Take risk-weighted assets assigned to the fixed income division, which has in the past consumed much of Credit Suisse’s balance sheet. These dropped 45 percent year-on-year. Yet revenue here was down just 21 percent.

The disappointment is that Credit Suisse still hasn’t got a grip on costs. Operating expenses in the first quarter were down little more than 7 percent year-on-year, even as underlying revenue across the bank dropped 15 percent. Executives say the cost-cutting programme is on track, and dismiss talk of more job losses. But if the revived euro zone crisis chokes off activity, Credit Suisse – like its rivals – may need to chop further.

Meanwhile, the bank still has work to do to get its capital ratios in shape. If the Basel III regime were applied in full, Credit Suisse’s common equity Tier 1 capital ratio would be less than 7 percent – and still a shade below 10 percent by the end of 2013. The bank’s shares, which were largely unmoved by the results, suggest investors remain to be persuaded that Credit Suisse can thrive in its new environment.


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