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Credit Suisse (CS) Reports Loss in Q4 on DOJ Settlement

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Credit Suisse Group AG CS reported dismal fourth-quarter 2016 results. Net loss attributable to shareholders came in at CHF 2.35 billion ($1.76 billion) compared with the net loss of CHF 5.83 billion in the year-ago quarter. Results included net litigation provisions of CHF 2.2 billion, primarily associated with the settlement with the U.S. Department of Justice (DOJ) in relation to legacy residential mortgage-backed securities (RMBS) business.

Results reflected higher revenues and increase in provisions. However, effective cost-control measures aided in lowering the operating expenses and acted as a tailwind.

For full-year 2016, net loss attributable to shareholders came in at CHF 2.44 billion, compared with net loss of CHF 2.94 billion in the prior year.

Revenues Escalate; Cost Control Reflected

Net revenues came in at CHF 5.4 billion ($4.0 billion), up 24% from the prior-year quarter.

Net interest income was CHF 1.6 billion ($1.2 billion), down 26% from the year-ago quarter. Commissions and fees came in at CHF 2.9 billion ($2.2 billion), up 1% year over year.

Total operating expenses slumped 51% year over year to CHF 4.6 billion ($3.4 billion), mainly due to lower compensation and benefits expenses, and restructuring expenses. These were partially offset by higher general and administrative expenses, primarily due to elevated net litigation provisions, including settlement with the DOJ.

Provision for credit losses came in at CHF 47 million ($35 million), up 42% from the prior-year quarter.

Strong Capital and Funding

As of Dec 31, 2016, Credit Suisse’s Look-through Basel III common equity tier 1 (CET 1) ratio was 11.6% and within the targeted range of 11—12% for the year.

As of Dec 31, 2016, the Look-Through Swiss CET1 leverage ratio was 3.3%. The Basel III CET1 ratio was 13.6%, down from 14.3% in the prior quarter.

Look-through risk-weighted assets declined 8% year over year to CHF 268 billion ($199 billion) at the end of the quarter.

Updates on Cost Saving Plan

Credit Suisse remains on track to achieve its cost-saving targets. The company is well positioned to trim its operating cost base below CHF 17.0 billion by the end of 2018.

Our Viewpoint

Prudent business model changes can improve Credit Suisse’s efficiency and boost its competitive edge. Given the challenging macroeconomic environment, though we expect Credit Suisse’s earnings to remain under pressure; the company’s focus on capital generation and restructuring initiatives look encouraging. Currently, Credit Suisse carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Deutsche Bank AG DB reported net loss of €1.9 billion ($2.05 billion) in fourth-quarter 2016 compared with the loss of €2.1 billion in the prior-year quarter. Loss before income taxes came in at €2.4billion ($2.6 billion), compared with the loss of €2.7 billion in the year-earlier quarter.

UBS Group AG UBS reported fourth-quarter 2016 pre-tax operating profit of CHF 1.11 billion ($1.11 billion) on an adjusted basis, up 46.6% from the prior-year quarter. While results reflected increase in net trading income, they recorded a decline in net fee and commission income. Notably, the quarter benefited from the company’s consistent focus on expense management.

Itau Unibanco Holding S.A. ITUB gained around 1.47% on the NYSE following its fourth-quarter 2016 earnings release. The company posted recurring earnings of R$5.8 billion ($1.8 billion), up 1.8% year over year. Including non-recurring items, net income came in at R$5.5 billion ($1.7 billion), down 3.5% year over year. Results reflected lower managerial financial margin, reduced revenues and higher expenses.

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