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Investment Overview for Credit Suisse (NYSE:CS)
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Founded in 1856, Credit Suisse provides companies, institutional clients and high-net-worth private clients worldwide, as well as retail clients in Switzerland with advisory services and financial products. It is the second largest Swiss bank, after UBS.
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Trading equities & derivatives is more valuable for Credit Suisse than trading bonds, currencies and commodities
Credit Suisse's trading assets for bonds, currencies and commodities are comparable to its trading assets for equities & derivatives. However, the bank has chosen to focus on its equities trading business in the years to come. Also, we estimate better yields from equities trading compared to the bond trading business in subsequent periods. This makes the equities & derivatives trading division more valuable for Credit Suisse than bonds, currencies and commodities trading.
Private banking more valuable than asset management
Credit Suisse's total assets under management (AUM) for its private banking division (Wealth Management and Corporate & Institutional Clients) is more than double the AUM for the asset management division. Because of this massive discrepancy the bank's private banking division makes up a larger portion of our price estimate for Credit Suisse's stock.
International wealth management clients more valuable than Swiss clients
The bank's assets under management (AUM) for international clients is nearly 1.5 times that of Swiss clients. This coupled with the bank's focus on growing its international business makes international clients more valuable to its wealth management business.
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Increasing demand for investment banking services in emerging markets
With GDP and per capita income of emerging markets growing rapidly, there is an increasing demand for capital from companies in these markets to support the growing purchasing power of the people. Also with the integration of these markets with the global economy, there is a shifting trend in these countries from family-run businesses to corporations. As a result of these factors, an increasing number of companies in these markets are going public, leading to a growing demand for equity underwriting services. Additionally consolidation across different sectors is driving demand for M&A advisory services.
Volcker Rule to affect proprietary trading
The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. Credit Suisse's proprietary trading desks have accounted for a significant percentage of its earnings in the past. The Volcker Rule is likely to result in a decline in prop trading revenues.
Economic recovery will stimulate the asset management industry
As global economic conditions eventually recover we expect that investors' risk appetites will increase which should drive inflows to asset management firms. This increased risk appetite will likely stimulate investments in multi-asset, alternative and equity products, while signs of a recovery in the real estate market should improve prospects in alternative investments.
Other long-term trends, including the on-going shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies will also positively impact revenues and AUM.
Trefis Forecast Rationale for Credit Suisse's Fixed Income Trading Assets
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This represents the fair value of trading assets allocated to Credit Suisse's Fixed Income ("bonds"), Currencies & Commodities (FICC) division. Trading assets include net derivative contracts related to interest rates, credit, foreign exchange and commodities.
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${forecast} remained increased from $205 billion in 2005 to $241 billion in 2007, as this period saw major investment banks like Credit Suisse building up their trading portfolios due to higher returns across all major asset classes. However, trading assets fell to $194 billion by 2009 in wake of the global economic crisis, before recovering to $222 billion by 2011.
As economic conditions eventually recover, we expect trading assets to gradually increase over the Trefis forecast period.
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Trefis considered the following factors for its forecast.
Supporting
- Improvement in market conditions, investor sentiment
- As market conditions and investor sentiment improve it will result in a higher risk appetite and more trading capital being deployed.
- Increase in long-term interest rates to drive fixed income investment
- The current low-interest rate environment has driven bond yields to near-record lows. As interest rates eventually normalize we expect that the resulting higher bond yields will make the fixed income asset class more attractive to investors. This should drive trading activity and assets.
- More liquidity in markets will improve valuations of less liquid assets
- Liquidity is a key factor in determining the fair value of trading assets. If liquidity is low in the market, it becomes hard to price trading assets.
- Illiquid assets such as CMBS notes and CDOs can be priced at depressed levels if there is no market for them. As economic conditions improve and these assets either approach maturity or have a more active trading market we expect valuations to improve.
Mitigating
- Competition remains strong amongst the top bulge bracket investment banks
- Competition in the Sales and Trading arena is quite tough. Credit Suisse competes with many top firms such as Goldman Sachs, Morgan Stanley, JP Morgan and Deutsche Bank. Each of the bulge bracket bank is reputed to be strong in certain areas - for instance Goldman Sachs has a strong reputation in fixed income products, JP Morgan has a strong commodities base, and Deutsche Bank provides good support in the FX space.
- Reduction of risk to slow growth in trading assets
- Many firms have been taking steps to reduce risk by reducing their balance sheets and risk weighted assets in an effort to reduce trading risk. This could impact trading assets going forward.
- Regulation expected to reduce certain trading activities of major banks
- The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. This rule could force the bank to further cut its balance sheet which would impact trading assets negatively.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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