Credit Suisse Holds Promise Despite Lukewarm Q4 Results

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Credit Suisse (NYSE:CS) reported worse than expected earnings for the last quarter of 2013 late last week, with the impact of poor investment banking revenues on the bottom line compounded by CHF 514 million (~$570 million) in legal reserves set aside by the Swiss banking group for the period. [1] The news did not have much of an impact on the bank’s shares, largely because the two factors that weighed against the results – lower debt trading revenues and higher litigation expenses – have plagued the global banking industry over the last two quarters.

There was some good news in the release, however. Based on the detailed reporting structure the bank unveiled last month, in which each reporting division is further classified into “strategic” and “non-strategic” sub-units, Credit Suisse performed better operationally in Q4 2013 compared to Q3 2013, with a 9% increase in net income. [2] The non-strategic units represent businesses the bank is looking to wind down in the near future, so an improvement in its ‘Core Strategic’ performance bodes well in terms of long-term profitability.

We maintain our $33 price estimate for Credit Suisse’s stock, which is about 10% ahead of its current market price.

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See our complete analysis of Credit Suisse here

Investment Banking Operations In The Red

Credit Suisse’s investment banking operations ended up with a loss of CHF 40 billion (~$45 million) in Q4 – the first quarterly loss since Q4 2011. The exceptionally strong performance by the business for the first quarter of the year saved the full-year results, though, with pre-tax income increasing 10% year-on-year.

In terms of revenues, the increased equity capital market activity witnessed over the last quarter more than made up for a sequentially weaker performance by the fixed-income trading desk. Equity underwriting revenues of CHF 273 million (~$300 million) and total underwriting revenues of CHF 755 million (~$840 million) were the highest in three years.

Wealth Management Income Continues To Slump

Credit Suisse’s cornerstone wealth management business remained depressed for yet another quarter with revenues remaining flat. With operating expenses growing slightly in Q4 compared to Q3, the net effect was a further reduction in pre-tax income figures for the business by roughly 7%.

But a closer look at the reported numbers shows that things aren’t that bad when it comes to operating performance. This is because the results for the last two quarters been impacted negatively by unfavorable currency movements over the second half of the year. To put things in perspective, currency translations reduced the size of Credit Suisse’s wealth management assets by CHF 18 billion (~$20 billion) and CHF 9 billion (~$10 billion) for Q3 and Q4 2013 respectively. One can infer that the improved performance-based fees in dollar terms for its operations in the U.S. due to improved market valuations of underlying assets was nullified in terms of Swiss francs.

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Notes:
  1. Fourth-Quarter and Full-Year 2013 Results, Credit Suisse Financial News, Feb 6 2014 []
  2. Release of restated historical financial information, Credit Suisse Press Releases, Jan 7 2014 []