Credit Suisse reaches bottom

Credit Suisse bosses, Oswald Grübel (left) and John Mack breaking the bad news Keystone

Credit Suisse appears to have convinced the markets that the worst is over, after posting a SFr2.1 billion ($1.44 billion) loss for the third quarter.

The group’s share price rallied on Thursday, after analysts said they expected Switzerland’s second largest bank to return to profitability next year.

Credit Suisse avoided incurring market wrath by warning of substantial losses well in advance of Thursday’s figure. The scale of the third-quarter loss dwarfed last year’s deficit of SFr299 million.

“The figures are clearly quite shocking,” said Hilary Cook, an analyst at Barclays in London. “But on the other hand they did pre-warn markets very well… and to that extent the markets are relatively happy with them.”

Credit Suisse’s share price rose more than seven per cent on Thursday to SFr29. It has fallen by some 60 per cent since the start of the year.

Cash drain

The main cash drain was at its struggling insurance arm, Winterthur, which plunged into the red to the tune of SFr1.4 billion in the third quarter. On Thursday, Credit Suisse named investment banker, Leonhard Fischer, formerly of Dresdner Kleinwort Wasserstein, as the new boss of Winterthur.

Credit Suisse said that despite the losses – slightly larger than had been expected – the group was on course to make a profit next year. “We’re putting measures in place in this quarter to return to profitability in 2003,” said chief financial officer, Philip Ryan.

Barclays analyst Hilary Cook told swissinfo the bank’s capital base was strong and that Winterthur had a good solvency margin. “That is certainly underpinning our ‘buy’ recommendation on shares.”

She added that markets were heartened by the group’s aggressive cost cutting and restructuring measures.

Cost cutting

“We’ve already seen some cost cutting, and there is more to come, and combine that with what is hoped to be a marginally better climate next year and the group should be able to return to profitability.”

Claude Zehnder of Zurich Cantonal Bank took a similar view. “The figures were a bit disappointing,” he said. “[But] the outlook for 2003 is not too bad and this is the last blow-out.”

Other factors contributing to the record loss included a net operating loss of $425 million at Credit Suisse First Boston (CSFB) due to restructuring, as well as higher credit provisions and reduced revenues because of poor market conditions.

The gap between Credit Suisse and its competitors was reinforced this week, after its main rival UBS reported better than expected third-quarter profits of SFr942 million.

Bad market conditions have hit Credit Suisse’s banking activities hard, but the main drain has been Winterthur.

Capital base

The group has made huge write-downs at Winterthur and has stepped in twice this year with cash injections totalling SFr3.7 billion to shore up its capital base.

The current woes are largely the result of the failed “bancassurance” strategy initiated by outgoing chief executive, Lukas Mühlemann.

He bought Winterthur in the late 1990s expecting that the two business – banking and insurance – would promote each other and lead to significant cost savings. The strategy backfired when the market collapsed, and Winterthur’s capital base – heavily supported by equities – was wiped out.

The group denies it has any intention of selling Winterthur, at least while the insurer is still losing money.

“The primary focus right now is to get these businesses [- Winterthur and CSFB -] back to profitability,” CFO Philip Ryan told swissinfo.

Credit Suisse First Boston, the group’s investment banking arm, has also been haemorrhaging money, as business has dried up.

CSFB recorded a net loss of $425 million in the third-quarter – wiping out a profit of $61 million in the previous three months. It had only just returned to the black after posting a $281 million loss in the same period last year.

Under co-CEO, John Mack, CSFB has already cut costs by $2.4 billion, as well as nearly 2,000 jobs.

He said the sale of CSFB was not on the cards, and the group as a whole had no plans to seek a merger. There has been speculation that the bank might be the subject of a takeover bid by UBS, Merrill Lynch or Deutsche Bank.

swissinfo

Credit Suisse third quarter

Credit Suisse reported a record quarterly net loss of SFr2.1 billion.
Leonhard Fischer named as the new CEO at Winterthur insurance arm.
Winterthur suffered a SFr1.4 billion loss in the third quarter.
The group said it would return to profitability in 2003.