UBS, Credit Suisse Boost Earnings After Strategic Shift -- 2nd Update

By Brian Blackstone Features Dow Jones Newswires

Swiss banking giants UBS Group AG and Credit Suisse Group AG posted better-than-expected profit last quarter, suggesting their bets that managing money for well-heeled clients is the right path for steady returns have paid off.

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The stakes are particularly high for Credit Suisse, which began this process years after UBS and has faced doubts in financial markets on whether it could deliver.

"For me what is the most unique in our story is we have grown more than the competition, cut costs more than most of competition, raised capital, reduced risk and reduced legacy assets," Credit Suisse chief executive Tidjane Thiam said.

Friday's results from Credit Suisse and UBS have broad implications for Switzerland's banking sector, which makes up a significant chunk of the country's economy and jobs. Beset for years by negative interest rates, hefty legal settlements and bumpy strategy changes, the sector appears to have turned a corner, although a strong recovery isn't at hand yet.

UBS said its net profit rose 14% during the second quarter to 1.17 billion Swiss francs ($1.21 billion), as its wealth management unit saw 7.5 billion francs in net new money. Credit Suisse posted net income of 303 million francs, above market forecasts and compared with a year-earlier profit of 170 million francs. Net new assets increased by nearly 23 billion francs in the first half of the year, pushing assets under management to a record high.

Meanwhile, on Monday, Swiss private bank Julius Baer said assets under management grew to 355 billion francs midyear, up 6% from the end of 2016.

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Credit Suisse delivered a "strong set of results against weak expectations," said analysts at Morgan Stanley, adding that the outlook for the bank's risk-weighted assets needed clarification.

Morgan Stanley said UBS's results were "fundamentally strong...yet also against elevated expectations."

Credit Suisse shares were up 2.6% Friday afternoon in Europe. UBS shares were down 2.1%, but had increased more in the run-up to Friday's results.

UBS and Credit Suisse have turned their focus to wealth management and scaled back investment banking, which can be profitable, but is also volatile and costly to operate. UBS started this process years ahead of Credit Suisse, which is midway through a three-year strategic program launched by Mr. Thiam.

UBS CEO Sergio Ermotti said Friday that the institution had "zero regret" for gearing its portfolio more toward wealth management and maintaining a more focused and capital-light investment bank. He cited independent experts who expect the wealth-management industry to grow twice as fast as global gross domestic product in the next five to 10 years.

And while operating revenues in UBS's investment banking unit were flat last quarter, "anyone who says our investment bank is dilutive is nuts," Mr. Ermotti said.

The refocusing process at Credit Suisse has been rocky and exposed internal divisions. The low point came one year into Mr. Thiam's tenure, when Credit Suisse shares dipped below 10 francs a share. The stock has recovered to 15 francs, well below the level around 25 francs when Mr. Thiam took the helm.

Mr. Thiam said Credit Suisse's share performance was typical of banks doing major restructuring and that Credit Suisse had the added headwind of starting the process during a rocky period in financial markets. The capital hike also diluted share value.

"I never doubted the outcome, it [the early phases of restructuring] was just unpleasant," Mr. Thiam said.

Credit Suisse lost 2.4 billion francs last year, mostly due to a legal settlement with the U.S. over crisis-era mortgage-backed securities. Still, its financial position was strong enough in the spring for the bank to shelve plans to sell a chunk of its profitable Swiss unit and raise capital by listing additional shares instead. The Swiss unit posted a strong profit last quarter.

The prospects for UBS, Credit Suisse and other Swiss banks are key to the Alpine country's economy.

Although the number of banks has fallen sharply in the past 20 years, the financial sector still generates--directly and indirectly--about 13% of Swiss GDP, according to a study by BAK Basel.

One positive from the reduction in banks--particularly the number of private banks--is there are fewer bankers chasing wealthy clients. A recent study by UBS found that ultra-high-net-worth investors were sitting on high cash piles, often in the range of 35% of their portfolios.

Changes in the banking sector "have separated the men from the boys," Julius Baer CEO Boris Collardi said on Monday. "I think there's going to be sustained growth for those that got it right."

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

July 28, 2017 09:32 ET (13:32 GMT)