Credit Suisse cuts RoE target, misses Q4 forecast

(Reuters) - Credit Suisse cut its profitability target and dividend, blaming tighter capital regulations, after it missed fourth-quarter profit forecasts on disappointing fixed-income trading.
The Swiss bank has cut its return on equity target -- a measure of profitability -- to "above 15 percent" from "above 18 percent," Chief Executive Brady Dougan said on Thursday.
The bank had 14.4 percent RoE in 2010.
Credit Suisse shares, which had risen 19 percent this year, making it the best-performing stock in the Swiss Market Index, were down 5.7 percent at 12:16 p.m. British time, underperforming a 2.0 percent fall in the European STOXX banking index.
"That is really a reflection of the new environment. We clearly have more capital being required for all banks," Dougan told Reuters Insider television.
"We think actually achieving more than 15 percent RoE over the next three to five years will be a best in class."
Other big banks could have to follow Credit Suisse in paring RoE targets due to new international rules that will force them to hold more capital in response to the financial crisis. But Swiss banks face even tougher capital requirements than rivals because of planned strict domestic regulations.
"The new targets seem to recognise the new reality of the harsher operating environment for their business.... They seem to have taken the route of lowering their targets rather than being better," said Helvea analyst Peter Thorne.
Switzerland's second-largest bank, Credit Suisse also cut its dividend to 1.30 francs from 2 francs in 2009, but said it expected to grow its dividend gradually as it builds capital.
Bigger domestic rival UBS, which has pledged not pay a dividend for some time as it retains earnings to build capital, said on Tuesday that the local regulations put Swiss banks at a disadvantage to peers abroad.
Credit Suisse won market share from UBS, saved from collapse by the Swiss state in 2008 after it ran up massive losses in the financial crisis, but it is now struggling to maintain its advantage as its arch rival finds its feet again.
While Credit Suisse and UBS have already cut back further on capital-sapping activities than most due to expected tougher Swiss rules, UBS's tier 1 ratio, a measure of capital strength, moved ahead of Credit Suisse's in the fourth quarter.
"This story comes down to capital. UBS has a capital surplus, and the comparison does not favour Credit Suisse," said Evolution Securities banking analyst Piers Brown.
Investment banking pretax income rose to 558 million Swiss francs ($579.8 million) from a lacklustre 395 million the previous quarter, but analysts said fixed-income, currency and commodities (FICC) trading disappointed compared to peers.
"FICC sales & trading was down 39 percent quarter on quarter, a larger drop than we had expected, given what we have seen so far from Deutsche Bank and UBS," said Andrew Lim from Matrix.
Dougan hired investment bankers aggressively early in 2010 just as markets flattened. His bold strategy initially backfired as trading revenues wilted in the third quarter, though Credit Suisse should benefit from any upturn in trading longer term.
While Credit Suisse's stress on client trading reduces the bank's risk-taking with its own assets, the bank said profits would still be subject to fluctuation and that the market outlook for the rates business remained subdued.
"There will be some quarters and some years that will be more active in terms of client flows and others that will be less active. Our business will certainly be dependent on those flows," Dougan told a press conference.
MARGIN PRESSURE
Credit Suisse attracted 9.6 billion of net new client money to its wealth management arm, down from 12.6 billion the previous quarter and slightly undershooting average analyst expectations for 10 billion.
The bank had benefited from clients leaving UBS in droves after massive writedowns on toxic assets, but UBS shares rallied on Tuesday as it stemmed outflows and said it expected to win more client money in 2011.
"The CS star did not shine so long. UBS has already done better than CS. The second-biggest bank is the second-best bank again. That is also a psychological problem," said one trader.
Credit Suisse echoed comments made by UBS that it attracted strong inflows from the ultra wealthy and emerging markets.
Credit Suisse reiterated a target for a net asset growth rate above 6 percent, but the bank said it had cut its pre-tax margin target for private banking and asset management to "above 35 percent" from 40 percent after flaccid client activity weighed on profitability last year.
Credit Suisse said its quarterly net profit was hit by 146 million of fair value charges on its own debt due to the tightening of credit spreads, as well as fair value losses on cross currency swaps relating to its own long-term debt.