Credit Suisse Shares Rally After Q4 Earnings Beat

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Credit Suisse

Credit Suisse (NYSE:CS) released its earnings for the fourth quarter of 2014 on Thursday, February 12, and the Swiss bank had several pieces of good news to share with investors. [1] The bank easily exceeded investor expectations for its operating results, as a strong performance by its cornerstone wealth management business helped mitigate the impact of weak trading revenues on its top line. While debt trading revenues took a hit over the period – a trend seen across the industry due to the sharp increase in debt market volatility in the month of December – the equity trading desk churned out the best results in six quarters (ignoring non-strategic units). Moreover, the bank significantly cut down on its legal provisions and slashed compensation expenses to ensure that the reduction in revenues does not drag down the earnings figure.

Most importantly, Credit Suisse vowed to keep costs in check to counter the impact from the Swiss central bank’s unexpected decision last month to abandon the cap on the Swiss franc. With the franc gaining against the U.S. dollar and the Euro, the bank estimates that it will see a 3% reduction in profits as a result. Finally, the bank is also looking to speed up its capital improvement efforts in the near future – focusing on its lagging leverage ratios.

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We believe that these proposed steps will ensure that Credit Suisse tides over the regulatory uncertainty that its business is currently facing. However, we have reduced our price estimate for Credit Suisse’s stock from $32 to $27 to account for some of the headwinds facing the business, including FX. This new estimate is roughly 25% ahead of the current market price.

See our complete analysis of Credit Suisse here

Wealth Management Business Upbeat, Still Room For Improvement

Credit Suisse’s cornerstone wealth management business had good news to offer for 2014, with a notable increase in assets under management (AUM). The bank reported an increase in AUM figures from clients across the globe, with a bulk of the growth coming from the Americas and the Asia-Pacific region. Wealth management assets from American clients were just shy of CHF 200 billion ($215 billion) at the end of Q4 2014 – a 14% jump year-on-year primarily due to favorable foreign exchange movements. The assets managed for Asia-Pacific clients saw strong inflows of CHF 17.3 billion ($18.5 billion) over the year – helping the total asset base for the region grow 24% over the year to reach CHF 144 billion ($155 billion).

As a result, the division’s total revenues crossed CHF 2.15 billion ($2.3 billion) for the first time since Q2 2013. More importantly, the recurring portion of these revenues were the highest in 14 quarters. The transaction- and performance-based revenues were below par, though, as the CHF 600 million ($640 million) figure was the lowest since Q4 2013.

Equity Trading, Advisory Units Lend A Hand

Investors did not expect much from Credit Suisse’s investment banking operations in Q4 2014, as the industry-wide trend of poor debt trading performance for the period was expected to hurt revenues at the Swiss bank. So when the bank reported a sequential 46% dip in debt trading revenues (at the strategic unit) for Q4 2014, investors instead chose to focus on the fact that year-on-year this figure actually improved 7%. Equity trading revenues (strategic unit) also grew 15% compared to the previous as well as year-ago periods. This is the best performance by the equities trading desk since Q2 2013.

On the other hand, the bank’s total investment banking operations (strategic and non-strategic units combined) made less than CHF 2.5 billion ($2.7 billion) for the first time in a quarter since the particularly dismal Q4 2011. This represents a 25% reduction quarter-on-quarter and an 8% decline year-on-year.

Operating Efficiency Will Remain Key

Over the last few years, Credit Suisse has been chipping away at its operations in order to meet its target of cutting recurring annual costs by nearly CHF 5 billion ($4.7 billion) by the end of 2015 compared to the figure in 2012. Despite recent regulatory headwinds, which have forced the bank to focus its efforts on shoring up its balance sheet, the bank looks set to achieve the goal over the second half of the year. While ongoing efforts to wind down or sell off the non-core operating units will remain an important channel for improving cost efficiency, Credit Suisse is also exploring other options including shifting jobs to low-cost locations and a reduction in its private banking headcount.

You can understand how an increase in operating margins helps Credit Suisse’s share price by making changes to the chart below.

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Notes:
  1. Fourth-Quarter and Full Year 2014 Results, Credit Suisse Investor News, Feb 12 2015 []