"Credit Suisse is confident of reaching a better solution," said the second person. Should talks break down, U.S. legal authorities could sue the bank, prolonging the uncertainty.
ZURICH: Credit Suisse reported an unexpected net profit for a second quarter in a row on Thursday though the surprise was largely down to real estate sales and Chief Executive Tidjane Thiam cautioned the outlook remained challenging.
For the three months to the end of September, the Swiss bank had net profit of 41 million Swiss francs ($42.2 million), well above the average estimate for a 120 million franc loss in a Reuters poll of five analysts.
The bank said it had made gains of 346 million francs from the sale of real estate and cut costs during the quarter while setting aside another 357 million francs for legal bills in cases mainly relating to mortgage-backed securities.
Thiam's plan for more stable earnings by expanding wealth management and placing less reliance on investment banking had a rocky start in the face of tough markets but it has received support from major investors.
"Looking ahead, we expect market activity to continue to be influenced by geopolitical and macro-economic uncertainty over the next several quarters and the outlook to remain challenging," Thiam said in a statement.
Credit Suisse shares dropped 4 percent when the market opened following the results and are down 40 percent in 2016, lagging the European banking sector index, which has fallen 20 percent.
Analysts said, while there had been healthy inflows into the wealth management side of the business, net margins have been declining since the start of the year.
"Structurally, we remain cautious on the Wealth Management outlook driven by concerns over cost and fee pressures, as well as continued global regularisation," Deutsche Bank analysts said in a note.
AHEAD ON COST CUTS
Thiam joined Zurich-based Credit Suisse in July 2015 and outlined his blueprint in October that year. He warned in September that transaction levels were lower when asked about client activity in the third quarter, though he later said it was still a "good quarter" for the bank.
In March, Credit Suisse took a bigger axe to its investment bank with a further 800 million francs in cost cuts and 2,000 more job cuts.
Credit Suisse said it expects to approach its cost base target in Global Markets of $5.4 billion by the end of 2016, two years ahead of schedule, and that it will give further updates on cost plans at an investor day on Dec. 7.
The bank has cut headcount by 5,400 so far this year out of the 6,000 it is aiming for.
Despite those reductions, headcount across the bank rose quarter-on-quarter to 47,690 from 47,180 but was down 0.8 percent year-on-year.
For example, 60 employees were added in its Global Markets division and 110 in its investment banking and capital markets division during the quarter.
"The third quarter normally sees a pick up in hiring with the graduate and intern intake," CFO David Mathers said. "It's a seasonal pattern. We're committed to reducing overall headcount, which also includes reducing contractors."
Its investment banking divisions, including trading and advisory and underwriting activity, reported net revenues of 2.4 billion Swiss francs, down 6.5 percent from a year earlier.
Fixed income trading across Global Markets and its APAC (Asia-Pacific) divisions rose 3.7 percent to 902 million francs, failing to benefit as much from a surge in bond trading that saw U.S. banks boost their income by more than half in the quarter.
Equity sales and trading revenue fell 38 percent to 690 million francs from a year ago, mirroring a broad decline across the industry hit by uncertain and volatile markets that have left investors more averse to risk.
In underwriting and advisory, the Swiss lender reported a 29 percent jump in revenue to 875 million francs as announced it was advising on a number of multi-billion M&A transactions.
MARGIN PRESSURE
Credit Suisse plans to float 20-30 percent of its Swiss subsidiary to raise 2 billion to 4 billion francs by the end of 2017 though the bank has said the timing of the listing will ultimately depend on market conditions.
In the third quarter, Credit Suisse's common equity Tier 1 capital ratio - a key measure of capital strength - rose to 12 percent from 11.8 percent in the previous quarter. This was at the top end of its target of 11-12 percent for 2016.
Net new money inflows - a volatile but important indicator of future earnings - totalled 9.2 billion francs at Credit Suisse's three private banking divisions, Asia Pacific, Switzerland and International Wealth Management.
"The revenue performance in Global Markets and International Wealth Management was weaker than consensus and we continue to see litigation overhang related to uncertainty around timing and amount of final RMBS settlement, as well as uncertainty around 'EU Passporting'", analysts at JPMorgan wrote in a note.
The 357 million franc increase in legal reserves follows last week's disclosure by rival UBS that it had set aside an extra $417 million to cover potential penalties tied to residential mortgage-backed securities (RMBS) cases. - Reuters
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