Robust Credit Suisse results leave Thiam with bigger challenge

Tidjane Thiam's task in restructuring Credit Suisse - already billed as one of the toughest in global finance - just became a bit harder, after strong trading revenues drove a double-digit surge in first quarter revenue at its investment bank.

The quandary for incoming chief executive Mr Thiam is that the investment bank is seen as the Credit Suisse's problem child, a volatile earner that sucks up so much capital investors fear for their dividends and increasingly worry about impending dilution if the bank needs to raise more cash.

"Most investors want to see less dependence on the investment bank," said Huw van Steenis, London-based banks' analyst at Morgan Stanley. "The strength of the returns in the first quarter makes Mr Thiam's challenge more difficult."

Hopes for a turnround in the bank's fortunes under Mr Thiam's stewardship are so high that Credit Suisse's share price rose 8 per cent on the day his appointment was announced. Mr Thiam, currently CEO of UK insurer Prudential, will succeed Brady Dougan in June.

The volatile markets that helped earnings at Wall Street's investment banks were also the main source of Credit Suisse investment bank's outperformance in the first quarter, driving a 10 per cent rise in sales and trading revenue at Switzerland's second-largest lender.

The surge brought total sales and trading revenue to SFr3.1bn, or 46 per cent of group-wide net revenue. Profits at the wider investment bank, in which sales and trading sits within, swelled to just over half of group-wide pre-tax earnings. Profits from wealth management, which is seen as the engine of future growth, rose 10 per cent but were only about a third of group earnings.

"The quarter was strong for the investment bank and wealth management, [but] capital is much more of an issue than whether the investment bank is more or less profitable in a quarter," said Kinner Lakhani, banks analyst at Citigroup.

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"CET1, already a concern for the market, went backwards in the quarter," said Omar Fall, an analyst with Jefferies. "The risk is that the debate around the incoming CEO shifts from the potential for strategic change to the risk of capital raising."

On a conference call with analysts, David Mathers, chief financial officer, said regulators were taking a tougher line on the way Credit Suisse assesses the riskiness of its assets. That is problematic because the capital ratio is high-quality capital divided by the bank's risk weighted assets.

"This [regulatory action] will limit reductions in group RWA even as we continue to wind down," Mr Mathers said. RWAs in the investment bank rose from $161m at the end of December to $163m at the end of March, despite a fall in leverage exposure from $794m to $697m.

Mr van Steenis at Morgan Stanley said the commentary around RWA was one of the most interesting aspects of the conference call. "There is plenty of headwind to capital formation," he added.

As well as the capital ratio, Credit Suisse will also have to comply with new rules on the ratio of banks total assets to high quality equity, dubbed the "leverage ratio".

"A good result from the investment bank shows that Credit Suisse won't need to cut the division as severely as UBS to improve profitability, nevertheless some cuts will be inevitable to improve the leverage ratio," said Jon Peace, banks' analyst at Nomura.

Another analyst said new capital demands meant it was a "done deal" that Mr Thiam would pull back from some parts of its fixed income, currencies and commodities business (FICC). FICC is the business Credit Suisse's domestic rival UBS dramatically cut back in 2012. Credit Suisse's net revenue from fixed income sales and trading was 28 per cent higher than equity sales and trading, but it rose less quickly.

Those hoping for cuts to the investment bank will also point to the 26 per cent fall off in advisory and underwriting fees in the first quarter, something that the bank attributed to its business mix.

Credit Suisse is strong in areas such as leveraged finance and financial sponsors, which were quieter in the first quarter, Mr Dougan said, adding that the trend had improved in the second quarter.

The bank repeated that it remains committed to its capital plan and gave short shrift to suggestions that a capital raising was in the offing. The market remained unconvinced, with shares down about 3 per cent most of the day, even though Credit Suisse's overall results were 23 per cent higher for the quarter and well ahead of expectations.

"Our base case is that there is a chance the new CEO may look to accelerate (capital formation)," said Mr van Steenis, in views that were echoed by several other analysts.

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