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Credit Suisse pulls ahead of UBS

July 23, 2009

UBS has always looked down its nose at its cross-town rival, but Credit Suisse under Brady Dougan has turned the tables on the blue-bloods. As UBS remains mired in a potentially catastrophic legal tussle with America’s tax collectors, CS is winning market share across the board.

With its second quarter results, Dougan has shown that the storming first quarter was no flash-in-the pan. Stripping out various one-offs (including a counter-intuitive 1.1 billion Swiss franc loss thanks to an improvement in the value of its own debt), Credit Suisse’s net income increased 62 percent on the first quarter, to 2.5 billion Swiss francs. That is equivalent to a boom-like 27 percent-plus return on equity.

Dougan can point to some long-term strengths underpinning this result. The bank has increased its tier 1 capital ratio to a market-leading15.5 percent. And it has managed to attract funds to the private bank, despite the collateral damage inflicted on all Swiss banks by UBS.

As Dougan puts it euphemistically, “We have continued to prepare our Wealth Management business for the new environment by expanding our international footprint and building an efficient, global platform that complies with applicable laws and regulations.” In other words, CS is not going to repeat UBS’s mistakes, and is going to diversify away from an America whose sympathy for Swiss bank secrecy is disappearing fast.

However, despite Dougan’s talk of an integrated bank, CS’s results are dominated by the investment bank.  Asset management has only just turned a profit. Clients are continuing to withdraw their money, and at a faster rate than in the first quarter.
Moreover, respectable results from private banking were helped by investment banking revenue booked from clients of the private bank. While this arguably shows the success of the “integrated bank” strategy, it masked a fall in recurring margins over the quarter.

So, investment banking dominates CS’s results even more than ever,  accounting for some 70 percent of net revenues, compared to less than 60 percent in 2005 . The bank has grabbed  share in equities, fixed income and some areas of investment banking. Dougan seems to think that CS is well-positioned whatever happens. If markets remain buoyant, CS will continue to grow share; if things turn down, there will be a flight to its well-capitalised quality.

However, the crisis is still fresh in the memory. Much of today’s investment banking profits across the industry result from a huge implicit subsidy via low central bank rates. Dougan will have to continue to engage in “close dialog with regulators around the world” if he wants to protect the bank from a taxpayer backlash.

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