Credit Suisse’s Earnings Surprisingly Good

Today (Thursday), Credit Suisse Group AG (CS) reported a surprisingly good first quarter, posting net earnings from continuing operations of CHF2.0 billion, well above the CHF2.1 billion loss in the prior-year quarter and our CHF297 million estimate.

This result largely reflected a CHF6.7 billion positive swing in trading revenues to CHF4.9 billion from a CHF1.8 billion loss a year ago as UBS had significantly higher fixed income trading revenues, record revenues in global rates and foreign exchange, and strong results in US RMBS and high-grade trading. This was partially offset by negative revenues from businesses the company is exiting, including valuation reductions of CHF1.4 billion for CMBS.

In total, companywide net revenues increased 170% to CHF8.1 billion from CHF3.0 billion in 2008’s first quarter as the large increase in trading revenues was partly offset by a 3% drop in net interest income and a 23% decrease in commissions and fees on lower asset-based fees due to declining capital markets and lower client activity.

The provision for credit losses rose 21% to CHF183 million (below our estimate), largely due to deteriorating asset quality in emerging markets and asset finance loans at the investment bank and general economic weakness in Switzerland at the corporate & retail bank.

Total operating expenses grew 18% year over year to CHF6.4 billion, principally reflecting a 34% increase in performance-based compensation costs. All other major expense line items declined due to the company’s cost-cutting efforts, which are expected to shave CHF2 billion in costs. Headcount has already been reduced by 2,100 since the end of the year.

CS’s capital adequacy continues solid as the company posted a 14.1% Tier 1 capital ratio at the end of March compared to 13.3% at year-end 2008. This was due to a 7% increase in Tier 1 capital from retained earnings growth and only a 1% gain in risk-adjusted assets, affected by significant US$ foreign currency translation effects. Unlike its Swiss counterpart UBS AG (UBS), Credit Suisse has not needed financial aid from the Swiss government.

Our current recommendation for CS is Hold. The Zacks rank is 5, indicating near-term selling pressure. In morning trading, CS shares are up over 13% from Wednesday’s closing price of $33.00.

Our estimates are under review.

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