Beauty lies in simplicity. So does the profitability. We can be sure Credit Suisse (NYSE:CS) believes so going by its announcement this Tuesday that it is giving its business model a simpler structure with just two broad, independent business divisions – the Private Banking & Wealth Management division and the Investment Banking division.  Responding to concerns raised by investors about declining profitability in recent quarters – a situation only expected to get worse as tighter regulations set-in over coming years – the second largest Swiss bank merged its asset management business with its private bank and remapped its reporting structure to pave the way for additional retrenches across the organization in subsequent quarters.
We maintain a $25 price estimate for Credit Suisse’s stock, which is about 10% higher than its current market price.
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Split Right Down The Center
The chart above is a visual representation of our analysis of Credit Suisse which shows how much we believe each business unit contributes to its total estimated share value. The rationale behind the bank’s decision to work with just two business divisions gets quite clear when we add the contributions from individual components that form the new private banking division (49.6% formed by wealth management, corporate & institutional clients, and wealth management units above) and the investment banking division (48.7% formed by debt & equity trading and origination besides advisory services). The remaining 1.7% represents corporate functions and non-controlling interests (NCI).
Credit Suisse has, in essence, split its business into near exact halves while making sure that similar functions are a part of the same business.
Cost Synergies Expected From Private Banking & Wealth Management division
We believe Credit Suisse will realize considerable cost savings from this newly created super-division. Various middle and back-office functions can be integrated, and a large number of support administrative functions would become redundant. This should help Credit Suisse eliminate quite a few jobs – which will go a long way in helping it fulfill its cost reduction goals. Only last month, the bank declared that over coming years it will slash costs by an additional CHF 1 billion ($1.1 billion) over and above the CHF 3 billion ($3.2 billion) target it set itself late last year.
And the revenue potential of the merger entity should not be affected much. After all, other big banks like Goldman Sachs (NYSE:GS) and Deutsche Bank (NYSE:DB) also manage their asset and wealth management businesses as a combined entity – and quite successfully at that.
Investment Banking Division Poised To Gain Share From Competitors
Interestingly, Credit Suisse has gone ahead with the exact opposite approach undertaken by its bigger competitor UBS (NYSE:UBS) when it comes to the investment banking business. While UBS announced its plans to cut more than 10,000 investment banking jobs and almost completely exit its fixed-income trading business, Credit Suisse seems to be happy with the current size of its business and is actually looking to work at improving its trading operations with a renewed focus.Notes:
- Credit Suisse announces organizational changes and appointments, Credit Suisse Press Releases, Nov 20 2012 [↩]