Banking Earning Release
Credit Suisse Group announces 1Q17 results
Credit Suisse profitable both on a reported and an adjusted* basis in 1Q17
Our strategy of being a leading wealth manager with strong investment banking capabilities delivered a significant profit increase in 1Q17
Group reported pre-tax income of CHF 670 million and Group adjusted* pre-tax income of CHF 889 million. On an adjusted* basis, our five operating divisions delivered pre-tax income of CHF 1.4 billion, partially offset by an adjusted* SRU pre-tax loss of USD 502 million
Continued strong performance in Wealth Management, with NNA across all divisions up 24% at CHF 12 billion1. Record AuM, up 14% year on year to CHF 712 billion1, and adjusted* pre-tax income of CHF 1 billion2, up 13% year on year, with returns substantially above the cost of capital
Global Markets delivered adjusted* pre-tax income of USD 338 million in 1Q17, an improvement of USD 436 million against an adjusted* pre-tax loss of USD 98 million in 1Q16. Adjusted* return on regulatory capital of 10% in 1Q17, net revenues of USD 1.6 billion, up 29% year on year; adjusted* non-compensation operating expenses down 11%, and continued capital discipline, with RWA down 12% compared to 1Q16. Excellent quarter in Credit (net revenues up 133%) and resilient performance in Equities (net revenues down 2%3)
Investment Banking & Capital Markets delivered best first quarter net revenue performance in the past four years, up 54% year on year with particularly strong performance in equity and debt underwriting. IBCM adjusted* pre-tax income up USD 183 million year on year and adjusted* return on regulatory capital of 23% in 1Q17
Maintaining capital discipline with look-through CET1 ratio of 11.7% and look-through CET1 leverage ratio of 3.3%
Raising capital by way of a fully underwritten rights offering for which the net proceeds are expected to amount to approximately CHF 4 billion4 and retaining full ownership of Swiss bank
Proposal to move to all cash dividend in the future, removing dilution associated with scrip dividend
Key business highlights
- Group net revenues of CHF 5.5 billion, up 19% compared to 1Q16
- Group pre-tax income of CHF 670 million, compared to pre-tax loss of CHF 484 million in 1Q16
- Group adjusted* pre-tax income of CHF 889 million, compared to adjusted* pre-tax loss of CHF 173 million in 1Q16, representing CHF 1.1 billion of adjusted* pre-tax income growth year on year
- Net income attributable to shareholders of CHF 596 million, compared to a net loss attributable to shareholders of CHF 302 million in 1Q16
Continued progress in core franchises
- Swiss Universal Bank delivered a record quarter with adjusted* pre-tax income of CHF 483 million, the fifth consecutive quarter with year-on-year adjusted* pre-tax income growth. Profitability was driven by stable net revenues year on year, while adjusted* total operating expenses decreased. We ended 1Q17 with record AuM of CHF 547 billion. In Private Clients, NNA reached CHF 2.0 billion, representing the highest quarterly NNA since 2Q14 and an annualized growth rate of 4%. Mandates penetration in Private Clients increased to 31%, driven by the continued success of Credit Suisse Invest. In Corporate & Institutional Clients, performance remained strong with continued momentum in investment banking. We retained our number 1 position in Investment Banking in Switzerland5.
- International Wealth Management had a strong start to 2017, delivering a 4% net revenue increase and 6% adjusted* pre-tax income growth year on year as well as a strong rebound in NNA of CHF 19.7 billion. Private Banking adjusted* pre-tax income reached a record level of CHF 262 million, with an increase of 8% compared to 1Q16 and 36% compared to 4Q16. While expenses remained flat compared to 1Q16, net revenues increased by 4%, driven by higher recurring fees, improved client activity and higher net interest income from loans. NNA in Private Banking amounted to CHF 4.7 billion, representing an annualized growth rate of 6% in both Emerging Markets and Europe. Asset Management adjusted* pre-tax income of CHF 65 million was stable year on year but marked a significant increase in profitability compared to 1Q16, which included a private equity gain of CHF 45 million. Management fees increased by 13% compared to 1Q16 and NNA were particularly strong at CHF 15.0 billion.
- Asia Pacific continued to deliver a strong performance in the Wealth Management & Connected business (WM&C), demonstrating the effectiveness of our integrated approach to serving UHNW, entrepreneur and corporate clients across the franchise. We generated NNA of CHF 5.3 billion and record AuM of CHF 177.4 billion in Private Banking within our WM&C business. Our WM&C business achieved record net revenues of CHF 589 million and adjusted* pre-tax income of CHF 205 million, up 44% and 67%, respectively, compared to 1Q16. In Private Banking within our WM&C business, we increased both gross and adjusted* net margins, up 10 bps and 1 bp, respectively, compared to 1Q16, supported by higher loan and deposit volumes. Net revenues in advisory, underwriting and financing increased by 100%, with a top 2 ranking in APAC ex-Japan among international banks5 in advisory and underwriting for 1Q17. Our objective is to increasingly align our Market business to Wealth Management activities, with efforts underway to reduce costs and complexity across the franchise. Our Markets business results in APAC were negative, reflecting significantly reduced activity in Rates, while our Cash and Credit activities remained comparatively resilient. We are seeking to address ongoing challenges in the Markets business through a reduction of adjusted* total operating expense, aiming to be below CHF 1.2 billion by end-2018.
- Investment Banking & Capital Markets increased its share of wallet in all key products compared to 1Q16, and achieved a top 5 ranking in each of Global M&A, IPOs and Leveraged Finance.5 Net revenues of USD 608 million were up 54% year on year, driven by substantial increases in equity and debt underwriting. IBCM achieved an adjusted* return on regulatory capital of 23%, with significantly higher returns in the Americas.
- Global Markets achieved substantially higher profitability compared to 1Q16, driven by strong performance in Credit and Securitized Products, where revenues were up 133% compared to 1Q16. Adjusted* non-compensation operating expenses decreased by 11% compared to 1Q16, reflecting our continued progress on accelerated cost reductions, placing us on track to deliver on our ambition of below USD 4.8 billion of costs by end-2018. Global Markets achieved net revenues of USD 1.6 billion and adjusted* pre-tax income of USD 338 million, representing an adjusted* return on regulatory capital of 10%.
Continued progress in reducing costs
- Strong reduction in adjusted* total operating expenses at constant FX rates to CHF 4.6 billion, representing our lowest level of expenses in a quarter since 2013.
- Adjusted* non-compensation expenses at constant FX rates down 15% compared to 1Q16 and down 13% compared to 4Q16; contractors’ expenses returned to 2013 levels.
Continued investment in compliance to ensure quality, compliant growth
- Dedicated compliance function established in October 2015, with oversight across the Group.
- Headcount in Compliance and Regulatory Affairs reached 2,000, up 35% and 78% compared to 1Q16 and 1Q15, respectively.
- Investments in compliance and controls increased 48% and 84% compared to 1Q16 and 1Q15, respectively, with 70% allocated to Wealth Management focused divisions.
Wind-down of non-core unit SRU by end-2018
- Continued to exceed the targets set for capital release at exit costs that are significantly less than planned.
- We are accelerating our plans for this division and aim to reach our 2019 capital targets one year earlier than originally planned without incremental pre-tax losses in excess of our current guidance.
- We expect the SRU program and division wind-down will therefore be completed by end-2018, with residual assets and operational infrastructure assigned to the rest of the Group from 2019 onwards.
Raising capital by way of a firmly underwritten rights offering, for which the net proceeds are expected to amount to approximately CHF 4 billion4 and retaining full ownership of our Swiss bank
In October 2015, we presented our strategy to be a leading wealth manager with strong investment banking capabilities. At the time, we were clear that we needed an additional CHF 9-11 billion of capital. Our capital plan involved raising CHF 6 billion by end-2015 by way of a private placement and rights offering in 4Q15, followed by generating at least CHF 1 billion of capital through asset disposals and other management actions during 2016. In addition, we announced that we were intending to undertake a partial IPO of Credit Suisse (Schweiz) AG in 2H17 in order to raise CHF 2-4 billion of capital for the Group.
On February 14, 2017, at our 4Q16 results presentation, we said that following the settlement with the US Department of Justice relating to our legacy residential mortgage-backed securities business, we would examine a range of options to determine the course of action with the most attractive risk/reward outcome for our shareholders.
After due consideration, the Board of Directors of Credit Suisse Group AG proposes to raise capital through a rights offering, firmly underwritten by a banking syndicate, for which the proceeds net of fees, expenses and taxes are expected to amount to approximately CHF 4 billion4 involving the issuance of 379'981'3404 new registered shares with a par value of CHF 0.04 each. The Board of Directors additionally proposes to retain full ownership of Credit Suisse (Schweiz) AG and to move to an all cash dividend in the future, thus removing the dilution associated with the scrip dividend.
1Q17 has provided further confirmation that we are delivering profitable and compliant growth, that we are executing with discipline and that we have generated positive momentum across our businesses. This capital increase will allow us to continue (i) to invest in profitable growth opportunities where we generate attractive returns; (ii) to strengthen balance sheet resilience for our clients and other stakeholders; and (iii) to afford the costs associated with our ongoing restructuring plans.
We expect the capital increase will strengthen our pro forma look-through CET1 ratio to approximately 13.4%4 and our pro forma look-through tier 1 leverage ratio to approximately 5.1%4, based on our end-1Q17 risk-weighted assets and leverage exposures. These strengthened capital ratios would bring Credit Suisse into line with our European peers.
The comprehensive set of capital management actions proposed aims ultimately to reverse the decline in the tangible book value per share that Credit Suisse has experienced over the past years and lays the foundations for the bank to accrete capital and return it to shareholders over time.
Revised key dates for scrip dividend
In order to allow eligible shareholders who will elect to receive the distribution for the financial year 2016 in the form of a scrip dividend to participate in the rights offering, the key dates of the scrip dividend have been moved forward slightly from the dates communicated earlier.
Outlook and current trading
We are only a few weeks into the second quarter and have continued to see positive NNA inflows in SUB, IWM and APAC. We have noted that political uncertainties have weighed somewhat on client volumes in the first few weeks of April. The outcome for the quarter will be dependent on political developments that are hard to predict at this stage. We are confident in our medium-term growth prospects. However, due to these uncertainties, we remain cautious in the short term.
Urs Rohner, Chairman of the Board of Credit Suisse, stated: “We have undertaken a thorough review of our options regarding the next stage of our capital plan and have asked our CEO and management team to make a recommendation to the Board of Directors. During those discussions, we carefully weighed the options of proceeding with the partial IPO of Credit Suisse (Schweiz) AG and raising capital through a rights offering to existing shareholders. The CEO and management team have proposed proceeding with a capital raise instead of a partial IPO, and this has been unanimously approved by the Board of Directors.
We believe that keeping 100% of our valuable Swiss bank, while raising capital through a rights offering with preemption rights, is the right course of action and will result in significant value creation for shareholders over time.
Regarding our current dividend policy, where we have experienced a high scrip take up over the past several years, the Board of Directors has also decided to move to proposing an all cash dividend for the financial year 2017 and beyond. This will mitigate the dilution associated with the option to elect for scrip dividends and will help reverse the decline in our tangible book value per share, which is a consequence of this structure. We expect that for the financial year 2017, the recommended cash dividend amount will be broadly similar, on a per share basis, to recent years. Our goal is to increase our payout ratio over time as Group profitability improves.
This is clearly an important period in the transformation of Credit Suisse. Our results in the first quarter of 2017 reflect the significant momentum that we have across our businesses and the attractive model that provides wealth management and investment banking services to our clients.
We believe that by raising capital now, we are able to maintain our profitable growth trajectory and seize compelling opportunities for our business, complete our restructuring plans, bolster our capital ratios and protect the bank against unforeseen market volatility.”
Tidjane Thiam, Chief Executive Officer of Credit Suisse, stated: “We have had a strong start to 2017, achieving profitability both on a reported and an adjusted* basis for the Group. This is an important step in the execution of our strategy that we started to implement in October 2015 a year ago. We are making good progress in our strategy of being a wealth manager with strong investment banking capabilities thanks to the continued trust of our clients and the hard work of our teams.
Our Wealth Management businesses attracted net new assets of CHF 12.0 billion1, up 24% year on year, and assets under management increased by CHF 90 billion to a record CHF 712 billion1 over the past 12 months. Within our investment banking businesses, we have delivered a strong performance overall, most notably in Global Markets, with net revenues of USD 1.6 billion, driven by a 133% increase in Credit year on year, and in Investment Banking & Capital Markets, with revenues of USD 608 million, up 54% compared to 1Q16, with particular strength in equity and debt underwriting. For both of these divisions, we have seen strong growth in profitability compared to 1Q16 and maintained our leading franchises across our key product lines5.
We still have a lot of work ahead of us but we are executing with discipline and making progress on the key aspects of our strategy. We are delivering strong growth, are ahead of our cost reduction targets and are increasing our operating leverage. We are investing significantly in our compliance and controls across the bank to ensure that we generate quality, compliant growth. In parallel, we have reduced capital consumption in our markets businesses in Global Markets and Asia Pacific, disposed of non-core businesses and reallocated capital resources to our growth businesses. We have also made significant progress in resolving legacy issues.
In this context, the Board of Directors has decided to raise capital through a rights offering and to retain full ownership of our operations in Switzerland. This capital raise will allow us (i) to continue to invest in growth at highly attractive returns; (ii) to strengthen balance sheet resilience for our clients and other stakeholders; and (iii) to afford the costs associated with our ongoing restructuring plans.
The decisions we have made and are announcing today on capital will allow us to grow our tangible book value per share and accrete capital, enhancing returns to our shareholders.
Our operating performance combined with the strengthening of our capital base, leaves us well positioned to increase our profitability and generate value for our shareholders and our clients.”
The complete 1Q17 Earnings Release and results presentation slides are available for download from 07:00 CET today at: credit-suisse.com/results