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Cost-Cutting Aims Seen As Driving Credit Suisse Acquisition In Japan

A desire to shed costs is seen as why Credit Suisse and HSBC agreed on a deal under which the Swiss bank will buy HSBC's Japan private bank.
Cost-conscious Credit Suisse will be able to use its agreed purchase of HSBC’s private banking business in Japan to consolidate its foothold in the Asian country and squeeze more efficiency gains. And the move also makes sense for HSBC as it sheds a non-core operation.
That’s the view of Christopher Wheeler, analyst at Mediobanca, about yesterday’s announcement from Switzerland’s second-largest bank and the UK/Hong Kong-listed behemoth.
Wheeler has a neutral recommendation on Credit Suisse’s stock, with a price target of SFr33 (around $35.45) and a “buy” stance on HSBC (£6.5 target). (By way of comparison, Morgan Stanley has a SFr25 price target on Credit Suisse and a £6.4 target on HSBC).
“This is an attractive deal for both banks. At HSBC, this is part of an ongoing `let’s get out of those businesses that are not competitive, don’t have scale and don’t fit the model’ sort of strategy,” Wheeler told this publication in a telephone call.
HSBC has not, for historical reasons, had a significant business presence in Japan in any event, so its move makes sense, he said.
In August, HSBC said it will shed 30,000 jobs worldwide by the end of 2013, as part of a drive to reduce costs by as much as $3.5 billion over the next two years to prepare for new, tougher capital requirements and a squeeze on margins from developments such as compliance costs and rising salaries.
Wheeler said the deal makes equal sense for the Zurich-listed bank.
Credit Suisse’s wealth management team, now led by a man with an acknowledged reputation for cost-controls, can wring efficiencies by blending some of the Japan operations at HSBC, he said. Wheeler argued that the recent move to bring in Clariden Leu more fully into the arms of Credit Suisse’s private bank was a sign of this trend.
Under the terms of the agreement, all of HSBC's Japan private banking operations will be merged with Credit Suisse's own private banking unit. The financial size of the transaction was not disclosed. The Swiss bank said the acquisition of HSBC's wealth management capabilities in the country expands client coverage through the integration of new offices in Osaka and Nagoya. Credit Suisse presently has an office in Tokyo.
The value of the gross assets included in the sale was approximately $2.7 billion at 31 October.
Earlier this year, HSBC said pre-tax profits for its global private bank fell in the third quarter and in the first nine months of 2011 from their comparable periods a year ago, with revenue rises more than offset by rising Swiss franc-denominated operating costs, rising regulatory burdens, and more hires. Pre-tax profits for the nine months to 30 September were $800 million, down from $830 million a year ago; in the three months to end-September, the figure was $248 million, down from $274 million a year before.
Credit Suisse’s private banking arm – comprising global wealth management and Swiss corporate and institutional clients – logged pre-tax income of SFr183 million (around $207. 4 million) in the third quarter, down 78 per cent from SFr836 million a year ago, affected by one-off litigation costs. The pre-tax income figures for the latest three-month period included litigation provisions of SFr295 million linked to US tax issues and SFr183 million connected to a German tax issue.