Credit Suisse misses profit forecast after legal charges

ZURICH Thu Feb 6, 2014 10:54am GMT

1 of 4. Brady W. Dougan, CEO of Credit Suisse, arrives for the full year results conference in Zurich February 6, 2014.

Credit: Reuters/Denis Balibouse

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ZURICH (Reuters) - Credit Suisse (CSGN.VX) missed expectations with a marginal uptick in fourth-quarter net profit on Thursday after increased legal costs arising from U.S. probes into alleged tax evasion and the sale of mortgage-backed bonds.

Credit Suisse is cutting back on riskier areas of business in the wake of the financial crisis and tougher regulation, but - as with many rivals - litigation headaches continue to swirl around Switzerland's second-largest bank.

Deutsche Bank (DBKGn.DE) last month blamed litigation costs for a surprise fourth-quarter loss.

Zurich-based Credit Suisse posted net profit of 267 million Swiss francs (£181 million) from 263 million a year earlier, after taking a 339 million franc provision over mortgage litigation at its investment bank and a 175 million franc one for a U.S. probe into hidden offshore accounts in Switzerland.

Analysts had on average forecast fourth-quarter net profit of 448 million francs.

"They are definitely haunted by the past. Operationally they don't look that strong either. It's a kind of new normal. Like every other bank, they have one-offs," said Rainer Skierka, analyst with private bank J. Safra Sarasin in Zurich.

"This looks quite weak. Especially investment banking looks quite weak. In investment banking they are not catching up with competitors on the cost base."

Credit Suisse shares were down 1.7 percent in early trading.

Robust results from crosstown rival UBS UBSN.VX on Tuesday vindicated that bank's decision to overhaul its investment bank and largely withdraw from riskier activities in fixed income where a slowdown has hurt rivals such as Goldman Sachs (GS.N) and Deutsche Bank.

Credit Suisse is making less radical cuts but in the last few months has ramped up efforts to reduce risk, including shrinking its interest rate trading arm, as market conditions worsen and regulatory requirements tighten.

Chief Executive Brady Dougan has pledged the overhaul will enable the group to meet a return on equity target of 15 percent, from 2.5 percent currently, but in the short-term the changes are hitting the bottom line.

Profits at Credit Suisse's investment bank were weighed by a 525 million franc loss due to shifting its undesired investment banking activities into a bad bank.

The investment bank posted a pretax loss of 40 million francs. Similar to rivals, its interest rates business suffered from a sharp drop in activity, while equities, credit and underwriting securities were healthier.

Compensation costs at the investment bank rose by over a fifth from the third quarter but overall, Credit Suisse said it was on track to cut spending by 4.5 billion francs by end-2015.

Credit Suisse said it would pay a 0.70 franc per share dividend, in cash. The bank paid a largely stock dividend of 0.75 francs in 2012, and flagged a return to cash when it met key capital ratios, which it did during the year.

EMERGING MARKETS HIT

Dougan said the bank's results so far this year had been largely consistent with good starts seen in previous years, with some differences depending on businesses.

One of those differences was emerging markets, where a recent sharp sell-off has sparked concerns it might hit trading at investment banks like Credit Suisse.

"It's certainly true that in our investment bank, whilst we've had a very strong start in credit and residential mortgages, our emerging markets business has been slower," financial chief David Mathers told journalists.

As tougher regulation and volatile markets dent investment banking returns, Credit Suisse is leaning more heavily on its private banking franchise, which is the fifth-largest in the world by assets.

The unit won 4.4 billion francs in fresh funds from clients, which is an important bellwether for future revenue. The new money, which missed forecasts for 5.27 billion francs, was won mainly from emerging markets and ultra-rich clients, or those with more than $50 million to bank.

Overall, the unit's pretax profit slipped to 870 million francs, from 911 million francs a year earlier due to the provision for the tax probe, which Credit Suisse is trying to settle.

The bank is one of 14 Swiss banks being targeted by U.S. prosecutors, for which it took a 295 million franc provision three years ago. UBS paid $780 million and handed over thousands of files on clients to settle its U.S. tax probe in 2009.

(Additional reporting by Caroline Copley. Editing by Carmel Crimmins and Mark Potter)

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