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By Brenna Hughes Neghaiwi
ZURICH (Reuters) - Credit Suisse has bulked up on provisions for expected credit losses and cautioned over uncertainty during the coronavirus outbreak, even as it posted a 75% rise in first-quarter net profit on Thursday, far outpacing expectations.
The first major European lender to report earnings since the pandemic upended markets and brought businesses and economies to a halt, Credit Suisse said it built up over one billion Swiss francs in reserves during the quarter to reflect the challenging environment and pressure on oil prices.
"I'm actually taking a lot of comfort in how we have managed so far in this crisis... We are very cautious, we are very aware of the overall slowdown in the economy," said Thomas Gottstein, presenting the bank's results for the first time since taking over as chief executive from Tidjane Thiam in February. "But I'm not losing any sleep."
Thiam quit after a scandal over spying on senior executives hit the bank's reputation.
Credit Suisse saw net profit rise to 1.314 billion Swiss francs ($1.35 billion) for January-March, well above analyst expectations for 997 million francs. Earnings were helped by tax rebates and one-off gains, and as a boost to trading revenue from volatile markets and "exceptionally high levels of client activity" helped cushion a rout in deal-making.
Excluding one-off items, a 2% gain in revenue was erased in pre-tax income as provisions for credit losses increased seven-fold.
U.S. banks have already set aside billions of dollars to cover potential loan defaults due to the virus, and other European lenders are expected to do likewise when they start reporting results over the next two weeks.
"It's clear that in the short term, over the next two or three quarters, with COVID-19 and the impact of it, (returns) are going to be challenged," said Gottstein.
Credit Suisse, which generates the bulk of profit from managing money for the rich, said its corporate lending business was starting to see some signs of stress.
Provisions for credit losses jumped to 568 million francs from 81 million francs in the first quarter of 2019, as each of the bank's divisions - led by investment banking - increased expectations for loan losses. Of the total, 376 million francs related to new U.S. accounting guidelines introduced in January.
"We view these as decent results, with a good revenue and cost performance," Citi analysts said in a client note, adding cost of risk appeared to have been front-loaded.
Credit Suisse shares pared back early trading gains to fall 1.1% by 0815 GMT.
The bank's capital ratio fell to 12.1% from 12.7%, in part due to companies drawing down from their credit facilities. Chief Financial Officer David Mathers said the bank broadly expected a ratio of around 11.5% for the year.
Its investment banking and capital markets division posted a 47% drop in revenue to 189 million francs as deal-making and IPOs ground to a standstill after a bumper start. However, its global markets trading division benefited from a spike in trading volume as frenzied markets pivoted sharply downward - with slighter upward spikes - as investors reacted to evolving news about the virus' spread and authorities' reactions.
The investment bank saw $147 million of mark-to-market losses in its leveraged underwriting portfolio and net losses of $51 million on hedges in uncollateralised corporate derivatives exposure.
The bank overall saw roughly $11 billion of drawdowns on corporate revolving credit facilities.
Fixed income revenue was up 17% to $1.2 billion, helped by higher volume in macro and global credit products, though unrealised loss in leveraged finance offset some of the gains. Equities revenue was up 22% on the year.
International Wealth Management, the bank's only standalone wealth division, meanwhile, benefited from higher levels of client activity, with revenue up 6% to 1.5 billion francs.
Assets under management fell by 0.1 trillion francs to 1.4 trillion francs as a result of negative market moves.
The fall in managed assets is widely expected to hurt earnings in coming quarters, as the bank generates lower fees from managing fewer assets.
Prior to the bank's January-March results, analysts had on average expected full-year net income to fall by a quarter to 2.6 billion francs.
Larger rival UBS has said it expects to report a first-quarter profit of around $1.5 billion on Tuesday.
($1 = 0.9708 Swiss francs)
(Reporting by Brenna Hughes Neghaiwi; Editing by Riham Alkousaa and Christopher Cushing)