Credit Suisse to exit commodities

image credit: Robert Scarth

Credit Suisse Group AG (NYSE:CS) said it will abandon commodities trading as a $2.6 billion fine to settle a U.S. tax investigation pushed the Swiss bank to its biggest quarterly loss since 2008.

The bank’s net loss in the second quarter was 700 million Swiss francs ($779 million), compared with a profit of 1.05 billion francs a year earlier and a 691 million-franc estimate from analysts. Zurich-based Credit Suisse posted higher-than- forecast earnings at the investment bank and lower profit in wealth management even as it attracted more net new money from rich clients than analysts had estimated.

Chief Executive Officer Brady Dougan is reporting a second quarterly loss in less than a year as Credit Suisse grapples with regulatory probes. Analysts and investors have said Credit Suisse should step up efforts to shrink its investment bank and focus on wealth management to boost returns and shore up capital eroded by the U.S. fine. The bank reaffirmed plans to cut at least 4.5 billion francs in annual costs by the end of next year compared with 2011.

“The decision to exit commodities was probably taken mainly in the light of the capital weakness,” Dirk Becker, a Frankfurt-based analyst with Kepler Cheuvreux, said by phone. “The results in the quarter weren’t that bad, with investment banking surprising on the upside. The only really negative development was the drop in wealth management gross margin.”

The settlement in May for helping Americans evade taxes raised questions among investors about Credit Suisse’s financial strength as the ratio of capital to risk-weighted assets for the first quarter fell to the lowest among 16 global investment banks tracked by Bloomberg Intelligence. The bank wants to boost the ratio to more than 10 percent by the end of the year from 9.5 percent at the end of June.

Further cuts

Credit Suisse shares fell as much as 2.7 percent today and were 1.5 percent lower at 25.71 francs at 1:06 p.m. in Zurich. Before today, the stock had dropped 4.3 percent this year, compared with a 2.9 percent decline for the Bloomberg Europe Banks and Financial Services Index.

Global investment banks are pulling back from commodities trading as regulations tighten and revenue slides. Deutsche Bank AG said in December that it would exit dedicated energy, agriculture, dry bulk and base metals trading. Barclays Plc said in April it would withdraw from most of its commodities activities. JPMorgan Chase & Co. agreed to sell its physical commodities unit to Mercuria Energy Group Ltd. for $3.5 billion in March.

Pretax profit at Credit Suisse’s investment bank was steady at 752 million francs, beating the 544 million-francs average estimate of six analysts surveyed by Bloomberg News. Revenue at the securities unit benefited from a 14 percent increase in fixed-income revenue to 1.43 billion francs and a 29 percent jump in equity underwriting to 268 million francs.

Wealth decline

Wealth management posted a 8.4 percent decline in pretax profit to 569 million francs, as the gross margin in the business, which measures how much revenue it produces in relation to assets under management, dropped to 99 basis points from 104 basis points in the first quarter. A basis point is one hundredth of a percentage point. The unit attracted 7.4 billion francs in net new money, more than the 6.2 billion francs expected by analysts.

Earnings from corporate and institutional clients and in asset management fell 19 percent to 211 million francs and 23 percent to 102 million francs, respectively.

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