Credit Suisse defends trading arm as profit jump fails to convince market

By Michael Shields and Brenna Hughes Neghaiwi

ZURICH (Reuters) - Credit Suisse defended its global markets trading arm on Thursday, even as losses at the division took the shine off a jump in quarterly profit as the bank wraps up a three-year revamp under Chief Executive Tidjane Thiam.

The unit, the focus of Thiam's cuts and a source of billions of dollars of losses over years, still has an important role to play after the restructuring to focus on managing billionaires' wealth and scale back investment banking, Thiam said.

"GM (global markets) is the lowest returning division in the company. In every portfolio, you will have a lowest-returning division," he said, as analysts probed him over plans for the unit. "The question is really: does the whole work and does the whole generate good returns?"

Switzerland's second-biggest bank has become more able to absorb trading volatility as it grows wealth management, he said, and further cuts in the global markets business could make it too small to be viable.

Third-quarter group net income jumped 74 percent to 424 million Swiss francs ($422 million), helped by the ongoing wind-down of its so-called Strategic Resolution Unit - a home for assets that have been a drag on the bank's past performance.

But that missed analysts' average estimate of 449 million francs in a Reuters poll.

CHALLENGING CONDITIONS

The bank will post a full-year profit this year, it said, the first since Thiam took over in 2015.

However, it ditched a 2018 net revenue target of $6 billion for its trading division as challenging market conditions - particularly tighter spreads and muted client activity in its credit business - and a restructuring charge pushed the unit to a 96-million franc pretax loss in the quarter.

Revenues of 4.02 billion francs through September lagged what the bank had hoped for, Thiam acknowledged.

"Look, I will just say, the 6 billion - it's not realistic and it's not achievable," he said. "I think it was a realistic number in a normal market environment. But, really, conditions have been such in our footprint, it is not achievable."

Credit Suisse said a $250 million cut to funding costs coupled with investments into its equities business should help the division raise returns next year.

Its shares were down 1.8 percent at 1135 GMT, as the results and assurances the bank expects to lift its return on tangible equity (ROTE) to 10-11 percent in 2019 failed to convince investors. ROTE was 6.3 percent in the first nine months of 2018.

Citi analysts, however, thought the reaction was overdone.

"We understand the poor sentiment towards CS (Credit Suisse) today on the weakness in Global Markets, but this needs to be put into the perspective of the achievements at the wider group," they said, keeping a "buy" rating on the stock.

Net new money inflows - a closely watched indicator of future earnings in wealth management - totaled 10.3 billion francs across the group's three wealth management businesses.

"We expect our Wealth Management-related businesses - across Swiss Universal Bank, International Wealth Management and Asia Pacific WM&C - to continue to benefit from broad-based, client-led growth in the final quarter of the year," the bank said.

Credit Suisse said investor sentiment generally turned more negative during the third quarter. It expected this to continue in the fourth, though it saw a healthy pipeline of transactions set to be completed this year depending on market conditions.

Bigger Swiss rival UBS made a net profit of 1.246 billion francs in the quarter. It said it was targeting ultra-rich Americans for growth.

(Reporting by Brenna Hughes Neghaiwi and Michael Shields; Editing by Jan Harvey and Mark Potter)