ZURICH (Reuters) - Credit Suisse cut its profitability target and 2010 dividend, blaming tighter capital regulations, after it missed profit forecasts for the fourth quarter on disappointing fixed income trading.
Chief Executive Brady Dougan said Credit Suisse had cut its return on equity target — a measure of profitability — to “above 15 percent” from “above 18 percent” due to tighter capital regulations. The bank had RoE of 14.4 percent in 2010.
“That’s really a reflection of the new environment. We clearly have more capital being required for all banks,” Dougan told Reuters Insider television.
Analysts have expected big integrated banks to review RoE targets due to new international banking rules that force them to hold more capital as a response to the financial crisis, but Swiss banks face even tougher capital requirements than rivals.
“The new targets seem to recognise the new reality of the harsher operating environment for their business.... They seem to have taken the route of lowering their targets rather than being better,” said Helvea analyst Peter Thorne.
Switzerland’s second-largest bank, Credit Suisse also cut its dividend to 1.30 francs from 2 francs in 2009, but said it expected to grow its dividend gradually as it builds capital.
Credit Suisse shares, which have risen 19 percent this year, to make them the best performing stock in the Swiss Market Index, were down 2.7 percent at 0916 GMT, underperforming the European STOXX banking indeX.
Investment banking pretax income rose to 558 million Swiss francs ($579.8 million) from a lacklustre 395 million the previous quarter, but analysts said fixed income, currency and commodities (FICC) trading disappointed compared to peers.
“FICC sales & trading was down 39 percent quarter on quarter, a larger drop than we had expected, given what we have seen so far from Deutsche Bank and UBS,” said Andrew Lim from Matrix.
Dougan hired investment bankers aggressively early in 2010 just as markets flattened. His bold strategy initially backfired as trading revenues wilted in the third quarter, though Credit Suisse is widely seen as well placed to benefit from any upturn in trading activity longer term.
“The focus is on clients, and it’s on flow and it’s on turning the inventory, on turning the assets, and if we can do that we can actually generate very high returns on capital,” Dougan told Insider.
Chief Financial Officer David Mathers said average compensation decreased by 9 percent in 2010 and said the bank would reduce variable compensation by 25 percent year on year.
Credit Suisse attracted 9.6 billion of net new client money to its wealth management arm, down from 12.6 billion the previous quarter and slightly undershooting average analyst expectations for 10 billion.
The bank had benefited from clients leaving in droves from rival UBS, which was rescued by the Swiss state in 2008 after massive writedowns on toxic assets, but UBS said on Tuesday it expected to win more client money in 2011.
“The CS star didn’t shine so long. UBS has already done better than CS. The second-biggest bank is the second-best bank again. That is also a psychological problem,” said one trader.
Credit Suisse echoed comments made by UBS that it attracted strong inflows from the ultra wealthy and emerging markets.
Credit Suisse reiterated a target for a net asset growth rate above 6 percent, but the bank said it had cut its pre-tax margin target for private banking and asset management to “above 35 percent” from 40 percent.
Credit Suisse said its quarterly net profit was hit by 146 million of fair value charges on its own debt due to the tightening of credit spreads, as well as fair value losses on cross currency swaps relating to its own long-term debt.
(Writing by Emma Thomasson; additional reporting by Martin de Sa’Pinto; Editing by Jon Loades-Carter and Sophie Walker)
$1 = 0.9623 Swiss franc