Credit Suisse Group AG (ADR) (CS) Posts Dismal Q1 Earnings

Credit Suisse Group AG (ADR) (NYSE:CS) (Snapshot Report) reported first-quarter 2014 net income attributable to shareholders of CHF 859.0 million ($962.1 million), down 34% from the year-ago quarter.

Results were affected by decreased trading revenues and higher provision for credit losses. However, effective cost control measures helped lower operating expenses.

Quarter in Detail

Net revenues came in at CHF 6.5 billion ($7.3 billion), down 8% from the prior-year quarter. The decline was primarily due to a 65% fall in the trading revenues.

Net interest income was CHF 2.2 billion ($2.5 billion), up 21% from the prior-year quarter. Commissions and fees came in at CHF 3.3 billion ($3.8 billion), up 1.0%.

Total operating expenses was down 3% year over year to CHF 5.0 million ($5.6 million), primarily due to lower overheads costs including commission expenses and other operating expenses.

Provision for credit losses came in at CHF 34.0 million ($38.1 million), up 55% from the prior-year quarter. Credit Suisse Group AG (ADR) (NYSE:CS) recorded litigation provisions of CHF 107.0 million ($119.8 million) during the quarter.

Core Segment Performances

The Private Banking & Wealth Management segment reported net revenue of CHF 3.2 billion ($3.6 billion), down 1% from the prior-year period. The dip was primarily due to lower net interest income as well as recurring commissions and fees in the segment.

The Investment Banking unit reported net revenue of CHF 3.4 billion ($3.8 billion), down 13% from the prior-year quarter. The decline was mainly due to reduced revenues from fixed income as well as equity sales and trading.

Expense Reduction and Other Initiatives

Credit Suisse Group AG (ADR) (NYSE:CS) continued with its expense reduction initiatives. As of the end of the first- quarter 2014, Credit Suisse generated expense savings of CHF 3.4 billion ($3.8 billion) on an adjusted annualized basis. The company is on track to achieve its end-2015 total run-rate reduction target of over CHF 4.5 billion ($5.0 billion).

The company is inching closer to achieve its targeted run-off of non-strategic units, which calls for a leverage reduction of CHF 11.0 billion ($12.3 billion) and reduction in risk-weighted asset of CHF 4.0 billion ($4.5 billion) in the non-strategic portfolio, without considering adjustments for methodology changes.

Capital and Funding

As of Mar 31, 2014, Credit Suisse Group AG (ADR) (NYSE:CS)’s Look-Through Basel III Total Capital ratio came in at 15.1%, in line with the prior quarter. Also, the Look-through Basel III common equity tier 1 (CET 1) ratio was in line with the prior quarter at 15.1%.

The Basel III CET1 ratio was 14.3%, down from 15.7% in the prior quarter primarily due to increase in risk-weighted assets and decline in CET1 capital.  Basel III risk-weighted assets rose 4% sequentially to CHF 286.0 billion ($320.3 billion) at the end of the quarter, owing to increases from methodology and policy changes, which were partially offset by business reductions.

As of Mar 31, 2014, the Look-Through Swiss Total Capital leverage ratio remained stable at 3.7% sequentially.

Our Viewpoint

The company started 2014 on a disappointing note. Given the challenging macroeconomic environment, we expect Credit Suisse Group AG (ADR) (NYSE:CS)’s earnings to continue to remain under pressure going forward.

However, prudent business model changes can improve the company’s efficiency and bolster its competitive edge. Further, Credit Suisse Group AG (ADR) (NYSE:CS)’s focus on capital generation and restructuring initiatives are encouraging. Also, the company is making efforts to gradually resolve its legal issues. We expect such efforts to improve the company’s fundamentals and efficiency in the long run.

At present, Credit Suisse carries a Zacks Rank #4 (Sell).

Earnings Dates of Other Foreign Banks

While U.K based Barclays PLC (ADR) (NYSE:BCS) (LON:BARC) (Snapshot Report) and German bank Deutsche Bank AG (NYSE:DB) (ETR:DBK) AG (Analyst Report) are scheduled to report results on Apr 30 and Apr 29, respectively, India based HDFC Bank Limited (ADR) (NYSE:HDB) (Analyst Report) is expected to release on Apr 20.