Ukraine – 25 March 2021: On a smartphone and a computer screen, the Credit Suisse logo of an investment banking… [+] corporation is visible in this photo illustration. (Image courtesy of Pavlo Gonchar/SOPA Images/LightRocket/Getty Images)
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[Updated on July 15, 2021] Update from Credit Suisse Credit Suisse stock (NYSE: CS) has lost 21% year to date, and its current price of $10 per share is 15% below its fair value of $12, according to Trefis’ valuation estimate. Greensill Capital, a supply-chain finance company with whom the bank has multiple relationships, including $10 billion in capital, collapsed in March, posing a number of issues for the bank this year. In a subsequent development, the company agreed to pay an extra $750 million to Greensill-linked supply chain finance fund investors, bringing the total amount paid to investors in the liquidation proceeds to $5.6 billion.
For the entire year 2020, Credit Suisse reported total net sales of $23.9 billion, up 4% year on year. While the bank’s sales and trading and investment banking businesses grew strongly, the positive effect was largely offset by an 11 percent decline in net interest income due to the reduced interest rate environment. Furthermore, the company reported total revenues of $8.4 billion in the first quarter of 2021, up 48 percent year over year, owing principally to an 80 percent growth in investment bank revenues. However, as the economy improves, investment bank revenues are expected to return to normal in the coming months. Furthermore, the current low interest rates are unlikely to return to pre-Covid-19 levels for some time. However, the bank’s international wealth management and Swiss bank businesses have had positive asset growth in recent quarters, and we expect the same to boost revenues this year. In FY2021, Credit Suisse’s revenues are expected to reach $25.9 billion.
Despite increased revenue in the first quarter, the bank reported a loss for the period. It was mostly owing to an increase in credit loss provisions from $557 million to $4.9 billion as a result of the Archegos Capital issue. In addition, we anticipate the bank to book more crisis-related losses in the second quarter. Overall, CS’ net interest margin is expected to deteriorate in FY2021, resulting in EPS of $1.04 for the year, which, when combined with a P/E multiple of slightly over 11x, will result in a valuation of roughly $12.
[Revised on 05/07/2021] Is Credit Suisse’s stock priced fairly?
Credit Suisse stock (NYSE: CS), the second-largest Swiss bank after UBS, has lost about 20% of its value, falling from around $13 in early 2020 to under $10 now, lagging the S&P500, which has gained 12%.
This was due to two distinct factors: First, there was the collapse of Greensill Capital, a supply-chain finance company with which the bank has a number of relationships, including $10 billion in capital. Second, the collapse of Archegos Capital, a U.S. hedge fund that took on too much risk and lost $4.7 billion in the first quarter of FY2021 as a result of the crisis. (Note: Credit Suisse’s reports were originally in CHF (Swiss Francs), however they have been changed to USD for comparison purposes.)
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However, we feel there is further upside in the months ahead.
Based on one significant opportunity and one risk element, Trefis forecasts Credit Suisse’s valuation to be roughly $12 per share, or around 13% higher than the current market price.
Credit Suisse Revenue growth in the next quarters is the opportunity we see. Credit Suisse announced $23.85 billion in full-year 2020 revenues, up 4% year over year, primarily owing to increased trading revenues, somewhat offset by an 11% reduction in net interest income due to interest rate headwinds. The company’s investment bank business grew 18 percent year over year, owing to stronger sales & trading and investment banking revenues as a result of higher trading volumes and an increase in underwriting deals. Furthermore, in the first quarter of 2021, investment bank revenues increased by 80% year over year to $3.9 billion. The Archegos debacle, however, resulted in a $2.56 billion operational loss for the business. However, greater trading volumes and underwriting transaction volumes are driving investment bank growth, which is projected to level off in the coming quarters. However, until then, the segment is expected to dominate quarterly performance. Furthermore, by the end of the first quarter, Credit Suisse Assets under Management (AuM) had surpassed $1.76 trillion (CHF 1.59 trillion), up 10% from the $1.61 trillion level at the end of 2020, owing to asset growth in the international wealth management and Swiss bank segments. Commissions and fees account for a large portion of the bank’s revenue – roughly 53% in 2020 – and an increase or drop in total AuM has a direct impact on it. As a result, rising AuM is a good indicator for the bank’s bottom line. For FY2021, we predict CS’ revenues to stay around $25.9 billion.
CS’ revenues are predicted to expand in FY2021, thanks to an expansion in the investment bank and wealth management segments, but the net income margin is expected to fall due to the Archegos Capital problem. In the first quarter of FY2021, the bank boosted its provision for loan losses from $153 million to $4.86 billion. It is expected to produce $1.04 in EPS for the year, which, when combined with the P/E multiple of just over 11x, will result in a valuation of roughly $12.
Finally, how much should the market be willing to pay for each dollar of Credit Suisse’s profits? To earn close to $1.04 a year from a bank, you’d need to deposit $104 in a savings account today, or 100 times the desired earnings. We’re talking about a P/E multiple of just over 10x at Credit Suisse’s current share price of around $10. We believe that a value closer to 11x is more suitable.
Banking, on the other hand, is a dangerous business right now. Core banking is showing signs of slowing growth, with less than rosy expectations in the short term. What’s going on here?
In fiscal year 2020, Credit Suisse recorded net loans of more than $310 billion. The economy has a direct impact on its clients’ ability to repay their loans. If the economy worsens, the bank will most likely face major loan defaults. In addition, due to the Archegos Capital situation, the bank increased its provision for loan losses to $4.86 billion in the first quarter. The impact of the crisis is expected to be felt again in the second quarter, with banks anticipating further losses. Furthermore, the low-interest-rate environment is anticipated to damage the bank’s net interest margin, reducing net interest income. To summarize, we believe Credit Suisse stock is now undervalued and has room for growth, owing to its strong investment banking and wealth management activities.
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