Credit Suisse Group AG is poised to report its biggest quarterly loss since the collapse of Lehman Brothers Holdings Inc after being fined $2.6 billion for helping American clients evade taxes.
The bank will on Tuesday post a loss of 701 million Swiss francs ($781 mn), hurt by a 1.6 billion-franc charge linked to the fine, according to the average estimate of seven analysts surveyed by Bloomberg. By contrast, larger competitor UBS AG may log an 812 million-franc quarterly profit next week.
Credit Suisse's loss would be the biggest since the fourth quarter of 2008. Uncertainty surrounding the outcome of the litigation and the bank's guilty plea to criminal charges slowed the flow of client money into the wealth management unit. Both Zurich-based firms have sought to expand in that area as stiffer regulatory requirements introduced in the wake of Lehman's collapse erode returns from investment banking.
"The insecurity before and after the guilty plea certainly didn't make the business easier," said Peter Stenz, a fund manager at Swisscanto Asset Management AG who helps manage 51.9 billion francs, including Credit Suisse shares.
Wealth management generated a third of Credit Suisse's 25.9 billion francs in 2013 revenue. Inflows slowed to 6.3 billion Swiss francs in the second quarter, according to the average estimate of eight analysts surveyed by Bloomberg News. That compares with an average of 8.2 billion francs for the second quarter of the previous three years. UBS added about 13 billion francs of client money in the quarter, according to the average estimate of four analysts. The three-year average was 11.2 billion francs.
'Little impact'
Credit Suisse Chief Executive Officer Brady Dougan, 54, said in May he expected "very little impact" on the bank's business after its main Swiss unit became the first global lender in a decade to admit to a crime in the US.
Dirk Becker, a Frankfurt-based analyst at Kepler Cheuvreux with a hold rating on the bank, said Dougan's comments may have been premature.
"I believe one has to wait a few weeks or maybe months to see whether there really is an impact," he said by telephone.
Credit Suisse Chief Financial Officer David Mathers said on May 28 that there was a "pause in activity" in the weeks before the settlement on May 19 but that business picked up in the days afterward.
Andreas Venditti, an analyst at Vontobel Holding AG who also has a hold rating on Credit Suisse, said the settlement probably wouldn't hurt the bank's wealth management business for long.
"If the fine had an impact, it will be visible in the second quarter," said Venditti, who is based in Zurich.
Pension funds
Although the settlement ended uncertainty about how harsh the punishment would be, it raised questions among investors about the bank's financial strength and about Dougan's future. While the CEO has said he wants to remain in post, politicians, including Christian Levrat, head of the Social Democrats, have called for his resignation over his handling of the tax case.
Credit Suisse is still awaiting permission from the US Labor Department to continue managing billions of dollars in assets in federally regulated pension plans - an activity thrown into doubt by its admission of guilt in its dispute with the Justice Department. The bank this month asked a US judge to postpone sentencing, set for August 12, pending the Labor Department's decision.
The effect of the guilty plea on asset management "isn't all that easy to handle," said Swisscanto's Stenz. "Credit Suisse may have been a little too optimistic there."
Shares fall
Credit Suisse has fallen 4.9 per cent in Zurich trading this year, compared with UBS's 2.8 percent decline. The Bloomberg European Banks Index fell 2.1 per cent in the period.
Officials at both Credit Suisse UBS declined to comment before earnings are published. UBS will report on July 29.
Matt Spick, an analyst at Deutsche Bank AG, said in a July 11 report that the tax case would slow inflows at Credit Suisse to the equivalent of 3.2 per cent a year from 5.4 per cent in the first quarter. That's below the bank's longterm target of 6 percent. Inflows at UBS wealth management will remain at 4.9 per cent, he estimates.
UBS was the world's biggest private bank at the end of 2013, according to Scorpio Partnership, a London-based consultant firm. Assets under management increased 15 per cent last year, faster than the 11 percent average growth for the top 25 private banks. Credit Suisse was the fourth-biggest private bank, with assets under management expanding 9.5 per cent in 2013, the firm said.
UBS's shadow
Credit Suisse "has historically been in the shadow of UBS," Sebastian Dovey, a London-based managing partner at Scorpio, said by telephone. Still, growth of 9.5 per cent is significant, he said.
Credit Suisse said last year it would shrink risk-weighted assets at its investment bank to reach a balance with its money- management business. The fine will add to pressure on Dougan to scale back the unit further.
The topic of further cuts to the investment bank is "on the table, namely because it is being requested time and again by investors and analysts," Chairman Urs Rohner said in a May interview with Neue Zuercher Zeitung.
Credit Suisse has "the most to gain" among European banks from further scaling down the investment bank in favor of a "highly profitable" money-management business, Goldman Sachs analysts led by Jernej Omahen wrote in a note to investors last month. "Recent events increase the probability of a strategic adjustment."
