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Credit Suisse warns worst may not be over after $1 billion hit

Credit Suisse warns worst may not be over after $1 billion hit

THURSDAY, April 23, 2020

Credit Suisse Group signaled the worst may not be over after the bank set aside $1 billion to cover the impact of the coronavirus, the biggest such hit in more than a decade.

Chief Executive Officer Thomas Gottstein said key profit targets and capital levels will be under pressure and the bank may need to put more cash to the side to cover bad loans or account for a drop in asset values. At the same time, it signaled that trying to predict the full impact on its business is still more art than science.

Switzerland's second-largest lender is giving the first window into how European lenders fared after the coronavirus pumeled economies and businesses at the end of the first quarter. Widespread lockdowns hit corporate clients and whipsawed markets last month, forcing goverments around the world to step in to try and cushion the economic damage.

"We are dealing with the most severe macroeconomic crisis that the world has seen since the 1920s," Chief Financial Officer David Mathers said on a conference call on Thursday.

Credit Suisse - in common with U.S. peers with which it shares the same accounting standards - s taking a large chunk of the expected pain up front. It's holding back 568 million Swiss francs ($585 million) for credit losses, almost triple what analysts had been expecting, and taking 444 million francs in charges to cover lower asset prices.

The Swiss bank still turned in a resilient performance in some of its most important businesses, with earnings and trading results that exceeded analysts' expectations. Trading results were just shy of the average of its U.S. peers though pre-tax profit at the global markets business beat estimates.

Gottstein, a 20-year Credit Suisse veteran and its first Swiss chief in almost two decades, is facing an extraordinary turn of events since taking over just two months ago and which may throw the bank's best-laid plans into disarray. He and Chief Financial Officer David Mathers warned that meeting the bank's 10% return on tangible equity target will be challenging in coming quarters, while the bank's CET1 ratio is also set to fall.

"In my first quarter as CEO of the group we all witnessed a highly challenging environment with a severe impact from the covid-19 pandemic," Gottstein said. "We delivered a resilient performance, while absorbing a significant reserve build of over 1 billion francs."

Credit Suisse swung between losses and gains in Zurich trading and was down 2.2% as of 11:36 a.m. The stock has lost about 41% so far this year after a period that saw stock markets plunge because of the virus.

The bank's key trading business did better than expected as volatility boosted client activity. Global markets posted 1.63 billion francs of revenue, while pre-tax income jumped almost a fifth. The bank said its CET1 ratio is set to slip this year to near 11.5% because of the reserve build.

The Asia wealth management business booked 96 million francs in provisions for credit losses related to three cases, the largest of which stemmed from Luckin Coffee, according to a person familiar with the matter. The unprecedented slump in crude prices also accounted for a significant portion of the provisions taken at the investment banking business as companies drew down on loan commitments and the economy deteriorated.

Credit Suisse is joining peers across the Atlantic, such as JPMorgan Chase and Wells Fargo, in bracing for a deeper slump. It has frozen plans to buy back as much as 1.5 billion francs ($1.53 billion) of shares this year due to economic uncertainty caused by the coronavirus. It is also withholding part of the 2019 dividends until the second half, acknowledging that the real test for the financial system won't come until later.

It remains to be seen how many of Credit Suisse's European peers will follow suit in building up provisions. European banks may seek to avoid setting aside billions of euros to cover bad loans or at least stagger some of the pain over several quarters, though Italy's UniCredit SpA said on Wednesday that it will take 900 million euros of provisions.

Other highlights of the bank's results:

- 1q net income CHF1.31 billion; estimate CHF997 million.

- 1q net revenue CHF5.78 billion vs. CHF5.39 billion.

- Return on tangible equity 13.1% vs 7.8% a year earlier.

- International wealth management revenue CHF1.5 billion vs CHF1.42 billion year earlier.

- Asia-Pacific revenue CHF1.03 billion vs CHF854 million.