Credit Suisse targets 50% payout plan as turnaround quickens

[ZURICH] Credit Suisse Group AG plans to return half its net income to shareholders through buybacks or special dividends as it seeks to reward investors who stumped up capital to bolster the bank's finances.

The lender confirmed its 2018 profit targets for key divisions including the Swiss Universal Bank, International Wealth Management and Investment Banking & Capital Markets and Global Markets businesses, it said in an emailed release ahead of its investor day in London. It stopped short of confirming a target at its Asia Pacific unit after losses at its markets unit.

After tapping shareholders for more than 10 billion francs (S$13.7 billion) in recent years, cutting thousands of jobs and selling risky assets, Credit Suisse is entering the final year of its restructuring.

It's outlining a payout target - which may not happen before 2019 or 2020 - to reward shareholders who've stayed with the bank. Chief executive officer Tidjane Thiam said earlier this week that he was "painfully aware" of the tough times shareholders have endured, and in the interview with Bloomberg Television, had signalled he was weighing returns.

"Our focus on wealth management is paying off as the franchise has delivered strong broad-based and profitable growth," Mr Thiam said in the statement.

"We have made strong progress towards our ambition of being a leading wealth manager with strong investment banking capabilities."

The bank's more market-dependent businesses continued to see trading conditions in the fourth quarter that were "broadly similar" to those in the third, with volatility remaining at historically low levels and some recent widening of spreads in the high-yield market.

This is weighing negatively on the performance of both its Global Market and Apac markets, with the bank saying it expects an adjusted pre-tax loss in its Apac markets business broadly in line with that of the prior quarter.

COSTS

Mr Thiam, a former insurance executive, has made cost cuts a major pillar of his strategy, focusing the restructuring on trading operations in New York and London where he's cut positions and reduced capital allocation to a markets division which today focuses on equities and credit trading. The bank said it may beat a target for its cost base of below 18.5 billion francs for this year on an adjusted basis and confirmed its ambition to reach a level lower than 17 billion francs for 2018.

For 2019 and 2020, Credit Suisse sees a total cost base of between 16.5 billion francs and 17 billion francs. The bank is also seeking to achieve a return on tangible equity of 10 per cent to 11 per cent for 2019 and 11 per cent to 12 per cent for 2020.

Credit Suisse is also betting on technology, where it sees the potential for cost savings.

"For example, we aim to implement more robots and to increase the share of operating systems on the cloud by 2020.," the bank said, adding that from 2019 onwards those measures will result in incremental annual productivity gains of around 600 million francs to 800 million francs over the course of 2019 and 2020.

BAD BANK

Credit Suisse said its confident of completing the wind-down of the strategic resolution unit and lowered its 2019 adjusted pretax loss target to about US$500 million from US$800 million previously. The closure of the unit, a dumping ground for assets that no longer fit the bank's strategy or trades that went sour, is one of the key tasks for Credit Suisse to complete.

The SRU unwound 191,000 external derivative trades last year. Assets offloaded include a credit default swap portfolio - insurance contracts that pay out if a borrower defaults - sold to Citigroup Inc and US$3.1 billion in loans acquired by a UK pension plan.

BLOOMBERG