Published: Friday, 23 Oct 2009 | 1:59 AM ET

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Credit Suisse Group AG's forecast-beating third-quarter earnings were given a tepid reception by investors, wary that the bank's fat margins in investment banking could tempt back competitors.

Sharon Lorimer

The Swiss bank, which emerged as a winner from the credit crisis, managing without state aid, was upbeat on its prospects after exceeding net profit expectations by a wide margin thanks to strong client inflows and its investment banking business.

"They outperformed their peers in investment banking," said Sebastien Lemaire, an analyst with Natixis Securities. "For the time being they are well positioned. But earnings sustainability in the future is a tough question to answer.

Shares in Credit Suisse were down 2.1 percent at 58.80 francs at 1051 GMT, against a 1.8 percent fall in the DJ Stoxx index of European banks and a 2.6 percent dip in the stock of Swiss rival UBS AG.

"The stock has risen so much that investors are now taking profits," a trader said, noting a similar response to Deutsche Bank AG's better-than-expected  results on Wednesday.

The shares have outperformed those of rivals UBS and Deutsche Bank AG in the year to date.

Despite fatter margins, analysts pointed to a 16 percent fall in investment banking revenues from the previous quarter and lower pretax profits and margins at the private banking unit as other reasons behind Thursday's share fall.

Buoyant financial markets in the quarter and higher market share in some investment banking segments helped boost Credit Suisse's results, which came on the heels of strong earnings at U.S. investment banking rivals JP Morgan Chase & Co

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"Whilst the good investment banking results were no fluke, investors will continue to ask how sustainable the good margins are likely to be once the competitors re-enter the markets with force," said Helvea analyst Peter Thorne.

"Margins have held up longer than first expected, but are on their way down."

Credit Suisse for its part believes it can sustain those profits. In an interview with Reuters, investment banking Chief Executive Paul Calello said that the bank has gained market share, which should more than make up for future margin compression. The investment bank has been investing in businesses including foreign exchange, commodities, and prime services to help drive future profits, he added.

In a statement, Credit Suisse Group Chief Executive Officer Brady Dougan said: "If markets remain constructive, we expect to be able to maintain our momentum."

He added: "Even if markets become more difficult, we believe Credit Suisse is still positioned to perform well."

Credit Suisse, now with a higher market value than domestic rival, said on Thursday it made a net profit of 2.4 billion Swiss francs ($2.4 billion) in the three months to the end of September, its best quarter this year.

Analysts polled by Reuters had on average expected the bank to post a net profit of 1.6 billion Swiss francs.

Strong Wealth Inflows

The private bank unit attracted 13.1 billion francs of net new money, the strongest of any quarter this year. Analysts said this strength could ease any earnings volatility at the investment bank. Credit Suisse's ability to attract 3.9 billion francs of new assets at its asset management unit, which has been suffering outflows, was a positive surprise, traders said.

Credit Suisse, which posted results two days after unveiling a new pay structure, continued to shrink its balance sheet.

Its Tier 1 ratio, a closely watched measure of capital strength, rose to 16.4 percent, confirming it as one of the best-capitalized major banks in the world.

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Chief Financial Officer Renato Fassbind said the strong capital base would give the bank room for small or medium-sized acquisitions and was also enabling it to accrue a "more normalized" dividend.

Credit Suisse's investment bank reported third-quarter pretax profit of 1.7 billion francs. It ranked No. 5 in terms of investment banking revenue, making it the largest non-U.S. investment bank, Dealogic data show.

"We continue to see potential on the investment banking side," Fassbind said, adding that market conditions in October were consistent with the positive trend seen at the end of September.

UBS, which reports on Nov. 3, may not be able to benefit fully from the positive market trend as it shed some investment banking units as part of its restructuring.

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