Could Credit Suisse overtake its archrival?

Which way now for Credit Suisse? Keystone

Switzerland’s second-largest bank, Credit Suisse, has taken a big step towards achieving its goal of catching up with main rival UBS.

The CS Group surprised analysts on Thursday when it announced net profit of SFr5.63 billion ($4.77 billion) for 2004 – more than seven times what it earned in 2003.

Presenting the results at a news conference in Zurich, chief executive Oswald Grübel said he was “confident” the group could reach its target of SFr8 billion annual profit by 2007.

Doing so would put it on the same level as archrival UBS, the largest Swiss bank, which announced a record annual net profit of SFr8.09 billion just a week ago.

But analysts point out that Credit Suisse still has some way to go before it can meet its goal, and point to some fundamental outstanding differences between the two.

CS group management revealed the ambitious 2007 profit target at a presentation to investors last December, along with details of a major internal restructuring programme.

On the way

Analyst Peter Thorne of Helvea said the 2004 result was better than expected, and showed that CS was now “on the way”.

But he echoed other analysts in doubting that investment banking arm Credit Suisse First Boston would be able to meet its goal of generating SFr3 billion in net profit by 2007.

“Credit Suisse has two problems,” Thorne told swissinfo. “First, they have to get rid of Winterthur, and that brings in about SFr1 billion profit, so we might be looking at a 2007 total [profit] of nearer SFr7 billion.

“Second, my forecast for CSFB in 2007 is nearer SFr2 billion. What they need to do is get CSFB earning return on equity (ROE) of about 20 per cent, like the UBS investment bank division. At the moment there is little sign of that happening.”

CS bosses said in December that the projected CSFB profit would complement a forecast SFr4 billion from the Credit Suisse business unit and a further SFr1 billion from insurance arm Winterthur.

CSFB head Brady Dougan told the news conference that he was confident the SFr3 billion target could be met.

“We have very detailed plans that we are in the process of implementing, but we are not planning to go into too much detail on them in public,” he said.

Three new lines

The CS business unit (private banking plus corporate and retail banking) accounted for about 60 per cent of 2004 net profit (SFr3.37 billion), while CSFB and Winterthur brought in SFr1.84 billion and SFr728 million respectively.

The overall result would have been better but for a one-off charge of SFr242 million, resulting mainly from a provision relating to the sale in 2001 of insurance unit Winterthur International.

Under the restructuring programme, which is due to be implemented by the end of 2006, the group will create three distinct lines of business: private client services, corporate and investment banking, and asset management.

CSFB will thus be integrated into the private banking business, while Winterthur will be floated on the stock market.

Asset management will be positioned as a “core strength” across all business units.

Grübel said the restructuring would “enable us to remain competitive in the face of a mixed market environment that is expected to continue in 2005”.

He added that the intention to become a “fully integrated bank” would allow CS to “compete effectively by seizing growth opportunities and capturing revenue and cost synergies”.

Chalk and cheese?

CS also announced on Thursday that the board would request shareholder approval for the launch of a two-year share repurchase programme, worth up to SFr6 billion.

The move follows the launch of similar programmes by UBS and main German rival Deutsche Bank.

Analysts at Merrill Lynch described the announcement as the “biggest surprise” and commented: “It strikes us that CS is acting more and more like UBS – even as we worry that UBS might start acting less like UBS.”

However, Peter Thorne told swissinfo: “The buyback is a good sign that they are serious about shareholder value and won’t just fritter it away on some further acquisition. But it was already pretty well flagged in December.”

Share buy-back strategies notwithstanding, he pointed out that parallels with UBS should not be taken too far.

“UBS today is really two banks, whereas Credit Suisse is more like one and a few bits, so it’s rather like comparing chalk and cheese,” said Thorne.

The stock market as a whole would certainly not disagree – UBS has a market capitalisation of about SFr115 billion, compared with SFr62 billion for the CS Group.

Market capitalisation represents the current share price multiplied by the number of shares – in other words, the amount a buyer would have to pay to buy all the shares today.

swissinfo, Chris Lewis in Zurich

Key facts

CS 2004 net profit was SFr5.63 billion, with return on equity of 15.9%.
That was more than seven times the final 2003 profit figure.
However, the 2003 results were affected by a massive write-down of goodwill relating to Winterthur, after CS changed to US-style accounting procedures.
UBS net profit for 2004 was SFr8.09 billion, with ROE of 24.7%.

In brief

Analysts have reacted positively to the CS 2004 results, which exceeded most expectations.

However, they say the bank still has some way to go to meet its ambitious longer-term targets – or to catch up with rival UBS.

They say UBS is still much stronger in the investment banking sector – and doesn’t have to dispose of an unwanted insurance arm.