Credit Suisse Group Profit Tumbles
Swiss banking giant Credit Suisse Group’s second-quarter profit fell 23% amid rising expenses at the firm’s brokerage and investment banking units, the company said Wednesday.
Credit Suisse First Boston, the bank’s investment banking arm, is at the center of a U.S. investigation of how major brokerages doled out shares of hot initial public stock offerings in the late 1990s.
The bank holding company’s net income slumped to $771.8 million from $1 billion in the year-earlier period, the firm said.
Also, Chief Executive Lukas Muehlemann warned analysts that “we think third-quarter results will be below” the second-quarter figures.
Credit Suisse, UBS, Deutsche Bank and many other global banks are earning less as stock markets drop and the pace of mergers slows, slashing revenue and earnings at their once highly profitable brokerage and investment banking operations.
Second-quarter net income at Credit Suisse First Boston plunged to $95 million, down 68% from the second quarter of 2000, the parent firm said.
Costs at Credit Suisse’s investment bank are among the highest on Wall Street. The parent last month replaced the head of the unit with John Mack, the former president of rival Morgan Stanley Dean Witter & Co.
“The key issue at Credit Suisse is how John Mack proposes to cut costs,” said David Haysey, a fund manager at Deutsche Asset Management in London, which owns shares of the company.
Muehlemann, who presided over the rise in compensation expenses at CSFB, said the company has made progress in lowering costs, in part via layoffs of investment bankers. CSFB plans to announce a further cost-cutting plan next week, he said.
Compensation costs at CSFB, which last year added Donaldson, Lufkin & Jenrette to its operations, equaled almost 58% of operating income in the second quarter. That was far above the percentage at many of the firm’s rivals, including Morgan Stanley and Goldman Sachs Group.
“The cost-to-income ratio at Credit Suisse First Boston is still relatively high,” said Sandro Monti, a fund manager at BSI-Banca della Svizzera Italiana in Lugano, Switzerland, which owns Credit Suisse shares.
Allen Wheat, who was dismissed in favor of Mack, had set aside $1.2 billion to retain key employees after CSFB’s purchase of Donaldson Lufkin.
Still unknown are what additional costs CSFB might face as part of the government’s investigation of IPO allocations. The Securities and Exchange Commission and other regulators are studying whether CSFB and other brokerages received illegal kickbacks from investors in exchange for hot IPO shares.
CSFB has fired three brokers in connection with the investigation, but the company has denied any wrongdoing. The brokerage recently hired Gary Lynch, a former top enforcement official at the SEC, as general counsel.
Some analysts said it was likely that Lynch was brought in to try to broker a settlement with regulators.
