Credit Suisse beats first-quarter expectations

High market volatility helped Credit Suisse boost net income 23 per cent in the first quarter, but shares in the lender dropped over concerns that the bank may have to raise capital.

Despite the trading revenue and wealth management divisions both surpassing analysts' expectations, investors will expect incoming chief executive Tidjane Thiam, to address the bank's capital position when he succeeds Brady Dougan in June.

"The market has been debating this [further capital needs] and would not be surprised for the new chief executive to want to strengthen the capital position," said Kinner Lakhani, banks analyst at Citigroup.

Switzerland's second-largest bank on Tuesday reported net income of SFr1.1bn ($1.19bn) in the three months to March, but some analysts held back from celebrating, highlighting the fall in the group's key capital ratio measure and a poor performance in key areas of its investment banking division.

"They're good results," said Mr Dougan, presenting his final set of numbers before Mr Thiam moves over from his role as Prudential chief. Shares in the bank were down nearly 3 per cent in morning trading; they had previously gained more than 40 per cent from a low in February.

However, the bank's common equity tier one ratio, the most important measure of its financial strength, fell to 10 per cent - from 10.1 per cent a year earlier - partly because of regulatory changes to the treatment of certain assets. Mr Dougan said it was typically difficult to accrue capital in the first quarter.

Net revenue from underwriting and advisory services in Credit Suisse's investment bank fell 26 per cent year on year.

"These numbers show the Credit Suisse dilemma - an earnings beat, strong wealth management performance, but capital ratios are shaky and the investment bank is losing share versus peers," Matt Spick, an analyst with Deutsche Bank, said in a note to clients.

The bank's wealth management performance is seen as the most crucial aspect of its earnings profile, since that is the area of the business Mr Thiam is expected to focus his growth aspirations on. Pre-tax earnings there grew 10 per cent.

But the private banking and asset management division, which wealth management is part of, suffered a 3 per cent fall in pre-tax earnings, largely because of a poorer result from asset management, where pre-tax earnings fell 49 per cent year on year.

Credit Suisse's investment bank, which Mr Thiam is expected to pare back, enjoyed a 14 per cent year-on-year increase, driven by a 10 per cent rise in sales and trading revenue as the bank benefited from high levels of volatility.

The same market volatility has helped the US's five largest banks to collectively post the highest first-quarter sales and trading revenues in recent years, although performance has not been consistent. Morgan Stanley reported a 31 per cent rise in equity trading revenues for the quarter, while Citigroup reported a 9 per cent fall.

"In the quarter to date we've seen a continuation of the trends", Mr Dougan told the Financial Times, though he declined to say whether he expected trading revenues to continue at 10 per cent ahead of 2014's levels.

He attributed the fall in Credit Suisse's underwriting and advisory businesses to the fact that the bank was strong in leveraged finance and the private equity sponsors business, both of which were quieter in the first quarter.

"We feel very good about our position," he said, adding that trends had improved in the second quarter.

Analysts and investors have long worried about Credit Suisse's ability to cope with new capital rules.

"While the lack of progress in CET1 ratio reinforces our view that the new CEO will raise capital, we continue to believe this is priced in and potential dividend yield will support the valuation," wrote Jon Peace, an analyst at Nomura.

The figures also show Credit Suisse cuts its leverage in its strategic investment bank from $697bn to $648bn in the quarter.

In February, the bank promised to shrink faster ahead of new rules capping lenders' assets as a multiple of high quality equity.

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