Credit Suisse today said it expected to make a net loss of CHF 1.0 billion for the fourth quarter of 2002, taking net losses for the year as a whole to a record CHF 3.4 billion.
Analysts were surprised to find that the pre-tax charges included a provision of CHF 702 million (US$450 million) to cover litigation against CSFB in the United States involving research analyst independence, IPO allocation practices, Enron and other related litigation. This is in addition to a pre-tax charge of CHF 234 million (USD 150 million) to cover the costs of the previously announced agreement in principle with various US regulators involving research analyst independence and the allocation of IPO shares to executive officers.
Even the sale of Pershing to Bank of New York will see the giant Swiss bank book a (previously announced) after-tax loss of CHF 390 million (US$ 250 million) in the fourth quarter. Pershing was sold for USD 2 billion (approximately CHF 2.8 billion) in cash, together with the repayment of a USD 480 million (CHF 667 million) subordinated loan and an additional contingent payment of up to USD 50 million (CHF 70 million) based on future performance. The sale is expected to close in the first half of this year.
CSFB, which lost CHF 1.2 billion (US$ 790 million) in the fourth quarter of 2002, lost CHF 1.8 billion (US$ 1.2 billion) in 2002. The fourth quarter net loss reflects the charges for the regulatory agreement and litigation, the after-tax loss in connection with the sale of Pershing, and the charge in connection with a cost reduction programmes, totalling approximately USD 810 million (CHF 1.3 billion) after tax. Excluding these items as well as excluding the amortization of acquired intangible assets and goodwill totalling approximately USD 172 million (CHF 254 million) after tax, and excluding the cumulative positive effect from prior years of the accounting change for income taxes of approximately USD 163 million (CHF 254 million), Credit Suisse First Boston would expect to have a small net operating profit for the fourth quarter and for the full year 2002. Fourth quarter revenues and expenses are expected to be below third quarter levels. Credit provisions for impaired loans also declined in the fourth quarter, compared to the third quarter of 2002.
And it might not end there. Credit Suisse says the legal reserve charge relating to private litigation represents management’s best estimate after consultation with counsel of the probable aggregate costs associated with such matters. Credit Suisse First Boston believes that it has substantial defenses in these private litigation matters, which are at an early stage. Given that it is difficult to predict the outcome of these matters, where claimants seek large or indeterminate damages or where the cases present novel theories or involve a large number of parties, Credit Suisse First Boston cannot state with confidence what the timing or eventual outcome will actually be. The legal reserve may be subject to revision in the future.
In addition to the charges for the regulatory agreement and litigation and the after-tax loss in connection with the sale of Pershing, the Group’s fourth quarter 2002 net loss of approximately CHF 1.0 billion will include a restructuring charge of approximately CHF 72 million associated with the previously announced realignment of the onshore financial services activities in Europe; an expense of approximately USD 200 million (CHF 314 million), or USD 145 million (CHF 226 million) after tax, in connection with the previously announced USD 500 million (CHF 780 million) cost reduction program at Credit Suisse First Boston; and a cumulative positive effect from prior years of approximately CHF 520 million for the Group from the previously announced change in accounting policy to allow for capitalization of deferred tax assets with respect to net operating losses.
Credit Suisse Group said that capital ratios at year-end are expected to be in line with those at the end of the third quarter of 2002.
Co-Chief Executive Officer John J. Mack said: “While we expect challenging market conditions to continue throughout 2003, we are working to restore the Group to profitability. We remain focused on building our core businesses, which continue to hold key market leadership positions. At the same time, we are pursuing a range of aggressive measures across the Group to continue adapting our cost structure to this tough business environment, having already eliminated USD 3 billion (approximately CHF 4.7 billion) in costs at Credit Suisse First Boston since fall 2001. Further, the recent settlement in principle with the US regulators allows us to put this matter behind us.”
Business unit Credit Suisse Financial Services expects to report a net profit of approximately CHF 650 million for the fourth quarter of 2002 and a net loss of approximately CHF 220 million for the full year of 2002. The Private Banking segment is expected to post slightly higher fourth quarter results compared to the previous quarter. The Corporate and Retail Banking segment is expected to report lower fourth quarter results, compared with the third quarter, due to lower commission income and higher project costs. Both the Life & Pensions segment and the non-life Insurance segment are expected to return to profitability in the fourth quarter of 2002, posting better than expected investment results.
Detailed fourth quarter and full year 2002 results will be announced on February 25, 2003.