's resultscould improve in the second quarter after a smaller-than-expectedloss in the first three months of the year, but analyst doubts persistover the Swiss bank's ability to grow its Asian and wealth management businessesfast enough to avoid further investment banking cuts.
The bank'sfirst-quarter pretax loss of CHF484 million compared to a CHF 1.51 billion gainin the same year-ago period but was CHF142 million better than consensus estimates,according to Citi analysts. A 30% year-over-year drop in net revenues, largely drivenby the combined effects of downsizing and financial volatility at Credit Suisse'sglobal markets division, was partially compensated by operating expenses that camein almost 6% lower than estimates.
Thereare early signs for an improved bottom line in the second quarter, CEO Tidjane Thiamtold analysts during a call, pointing to profits in the bank's Asia Pacific, internationalwealth management and Swiss universal banking businesses. But the difficult capitalmarket conditions that struck the investment banking business in the first two monthsof the year could easily recur, CFO David Mathers said, cautioning that this couldalso have implications for Credit Suisse's capital position, another source of positivenews in the first quarter.
CreditSuisse's common equity Tier 1 ratio beat expectations by remaining stable from theend of December at 11.4%, as declining risk-weighted assets exactly offset a fallin capital. In comparison, its local rival UBS fell 20 basis points short of consensusat 11.1%. But routine capital costs relating to share awards of about 10 to 15 basispoints and an upcoming transfer of up to $15 billion in risk-weighted assets tothe bank's strategic resolution unit could drain some capital in the second quarter,Mathers said.
The bankis targeting CET1 capital of 11% to 12%, excluding any litigation costs, in 2016.
An 8%year-over-year fall in operating expenses to CHF4.8 billion in constant exchangerate terms might also prove hard to maintain in the second quarter, although itpositions Credit Suisse well for its CHF19.8 billion target this year, Mathers said.
"It'snot impossible that it could actually go up in the second quarter and then dropdownwards as the more structural changes we have come through," he said.
The better-than-expectedcapital performance came on the back of a faster drawdown on risk-weighted assetsthan analysts had calculated, Züricher Kantonalbank analyst Andreas Brun said inan interview.
"Itwas not really progression or a sustainable positive sign," Brun said, pointingto a near CHF2 billion year-over-year decline in first-quarter revenues to CHF4.64billion, as Credit Suisse aims to slash its global market division's RWAs by nearly30% to $60 billion and reduce global head count by 6,000 this year.
Globalmarkets' net revenues slumped 62% compared to the first quarter of last year to$972 million, with the division pressured not only by difficult markets but alsoby the need for those staff remaining to concentrate on downsizing. Longer term,the bank wants to achieve a 15% return on capital once the division's RWAs reachtheir target, Thiam said.
Whilehigher regulatory capital charges are prompting the cut-back in investment banking,Credit Suisse is aiming to boost its wealth management and Asian businesses. Thebank wants Asia Pacific and international wealth management to make CHF 2.1 billioneach in pretax income in 2018, under plans announced last October. Yet first-quarterpretax income came in at only CHF251 million in the former business, down 46% froma year earlier, and CHF270 million in the latter, up by only CHF7 million.
"Thereis no way they can reach the targets they showed us in October 2015," Brunsaid, adding that the bank might have to make more reductions to its beleagueredglobal markets business to compensate, despite the fact that these very cuts arefeeding most of its current decline in revenues.
"They'recommitted to their equity business there, but maybe there are still further cutsin FICC," he said, referring to fixed income, currencies and commodities.
It isalso difficult to see how any of Credit Suisse's private-banking return metrics— with gross margin beating UBS — could get much better, Bank Vontobel analyst AndreasVenditti said.
"Ifyou look at the international wealth management business on the private bankingside, margins of more than 300 basis points on loans, you really wonder what kindof loans these are," he said in an interview. "People rightly questionthe sustainability of this."