Credit Suisse Group AG ( CS )

Q2 2010 Earnings Call Transcript

July 22, 2010 4:30 am ET


Brady Dougan – CEO

Renato Fassbind – CFO

Walter Berchtold – CEO, Private Banking

Eric Varvel – CEO, Investment Bank


Philipp Zieschang – UBS

Teresa Nielsen – Bank Vontobel

Fiona Swaffield – Execution Noble

Huw Van Steenis – Morgan Stanley

Derek De Vries – Bank of America

Kinner Lakhani – Citi

Kian Abouhossein – JP Morgan

Jernej Omahen – Goldman Sachs

Matthew Clark – KBW

Matt Spick – Deutsche Bank

Dirk Hoffmann-Becking – Sanford C. Bernstein

Jeremy Sigee – Barclays Capital

Jon Peace – Nomura


Brady Dougan

Welcome everybody to our second quarter results. I’m joined by Renato Fassbind, our CFO. I’m going to make some very brief introductory remarks. Renato will take you through the details. I will make a few more comments, and then we will obviously open it up for Q&A. We also have as is our custom at the end of the second quarter, our divisional CEOs with us. So, we have Walter Berchtold, Eric Varvel, and Rob Shafir here. They will obviously be available also to help answer questions.

Second-quarter environment was obviously a difficult one, but nonetheless, I think our performance was resilient with a reported return on equity of 18%, overall revenues at

CHF 8.4 billion were only slightly down on the same period last year. We had positive pretax results across all our divisions with pre-tax income at 1.8 billion, slightly higher than the second quarter of 2009. So we think this consistent pattern of lower volatility results reflects our client focused capital efficient strategy.

The second-quarter results also demonstrate continued strong moment in our client franchise. We saw inflows of CHF 14 million of net new assets in the second quarter. That makes for the half-year 2010 total of over CHF 40 billion of net new assets.

We also saw continued market share momentum in our investment banking, especially in our equity franchise and also in our advisory and underwriting businesses. And asset management maintained a positive trend in asset inflows for the fourth quarter in a row.

At the end of the second quarter, we maintained our industry-leading capital strength with a Tier 1 of over 16%, and a conservative liquidity position. We do think that we are well positioned for the continued regulatory development. We are well capitalized. We are already subject to a leverage ratio and already comply with a strict liquidity regime.

Despite the continuing macroeconomic uncertainty, in the first half of 2010 we achieved a reported return on equity of 20% and underlying return of 17%, while making further substantial progress developing all of our businesses. We remain confident that our strategy is appropriate and resilient in the face of an uncertain and challenging economic and market environment.

Now I will turn it over to Renato Fassbind, who will take you through the results in more detail. Renato.

Renato Fassbind

Thank you Brady and good morning. I will start my presentation on slide five with an overview of the second quarter financial highlights. On a published basis, we achieved revenues of CHF 8.4 billion, and net income of CHF 1.6 billion. Diluted earnings per share stood at CHF 1.15 for the quarter. The published after tax return on equity stood at 18% for the quarter.

Total net new asset inflows of 14.5 billion reflected the continued strong contribution from our wealth management business. Looking at the bottom of the slide, as in previous quarters we have also calculated the underlying results. Overall net revenues were at 7.6 billion and the pre-tax income result was CHF 1.6 billion. The underlying return on equity was 12% this quarter. This adjusts for a credit from the widening of spreads on own debt, partially offset by the UK bonus tax payment and significant litigation provisions.

In addition, we recorded discrete tax benefit this quarter. A detailed reconciliation of the underlying results is included on slide 41 in the appendix of your pack. This is a solid performance during a challenging period for the banking sector, and demonstrates the resilience of our client focused, capital efficient strategy. Underlying return on equity for the first six months of 2010 stands at 17%, close to our medium-term target of 18% as we continue to deliver an industry leading return on equity.

Let me turn to slide six for an overview of our divisional results. This shows our second quarter 2010 divisional results side-by-side against the first-quarter and the second quarter of last year. With the press release-tax income of CHF 874 million, Private Banking reported a similar result to the first quarter. We continued to experience strong asset inflows in a challenging market environment with subdued client activity. Investment Banking results represent the resilient quarterly performance with pre-tax income of CHF 846 million, despite volatile market conditions from sovereign debt concerns and client risk aversion, resulting in reduced client activity across most businesses. Asset management continues to make progress in delivering a more focused business model. Pre-tax was CHF 22 million.

Let me continue by looking at the group’s operating expenses in more detail on slide seven. The second quarter expenses included some non-recurring items, so we’re showing this slide to better identify the trends in overall compensation and non-compensation expenses against the first quarter of 2010, and the second quarter of 2009. We remain disciplined in our approach to compensation.

At the top right-hand side of the slide, you can see that the increase in compensation compared to the first quarter resulted from the payment of the UK bonus tax of CHF 440 million, which was reported in the corporate centre. Adjusting for the item like-for-like, compensation and benefits were down 9% and 19% from the first quarter of 2010, and the second quarter of 2009 respectively, as a result of lower performance related compensation. We continued to build our capabilities increasing our headcount by a further 900 people in the quarter.

We have now increased our total employee number by 5% from a year ago. Adjusting for significant litigation provisions, other operating expenses increased by 10% quarter-over-quarter, as we continued to invest in business growth. Our priorities remain the strengthening of our flow businesses investment banking and expanding our international presence in private banking.

Marketing costs were seasonally higher in the second quarter and professional services also increased. So, overall total operating expenses were down 2% versus the first quarter and 7% against the second quarter of last year.

Let me move to the divisional results on slide eight. Challenges in the market environment resulted in subdued client activity as the industry landscape continues to evolve. However, private banking continued to report solid second-quarter results. We continued to demonstrate momentum in our industry-leading multishore business model with strong net new inflows of CHF 13.8 billion. Revenues were up in higher client foreign exchange income and brokerage fees, driven by market volatility, although performance fees were negatively affected by the market conditions.

Clients remain cautious with regard to more complex investment products. As a result, the gross margin remained stable compared to first-quarter at the cyclical low of 120 basis points. We’re encouraged by an increase in the number of integrated solution transactions in the first half of 2010, but the average transaction size is smaller than a year ago. Corporate and institutional client business continued to perform strongly.

Let me continue with further detail on our Private Banking results starting with our wealth management business on slide nine. Pre-tax for wealth management was CHF 633 million, a decrease of 6% over the first quarter of 2010. Net new asset inflows were strong at CHF 11.9 billion as we continued to gain market share. Revenues were up slightly, and more than offset by higher expenses, driven by continued investment in international platforms and client services, particularly IT related and higher sales and marketing costs.

We continued selective hiring adding a net 20 relationship managers. Gross new hires were 100, a delta of 80 here reflects the continued talent upgrade taking place within the business. In summary, the solid pre-tax result has been affected by the operating environment. However, strong asset inflows continued this quarter.

One slight 10, you will see our net new asset performance. The strong net new asset inflows of CHF 11.9 billion combined with the CHF 12.9 billion in the first quarter, represents an annualized growth rate of 6.2%, a significant outperformance in a challenging market. The balanced regional contribution demonstrates the strength of our platform and the trust our clients have in Credit Suisse. Inflows were particularly strong in EMEA in the second quarter, despite small outflows due to the situation in Germany.

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