Credit Suisse’s Mixed Q3 Results Followed By Plans To Overhaul Operations, Capital Structure

Investors did not pay particularly close attention to Credit Suisse’s (NYSE:CS) results for the third quarter of the year earlier this week, choosing to focus instead on the Swiss banking giant’s long-awaited plan to revamp its business model, which accompanied the earnings announcement. ^[1] After all, the bank’s lukewarm operating performance for Q3 2015 was not very different from what the largest U.S. banks reported over the last few days, with poor trading revenues dragging down total revenues. Credit Suisse’s top line figure fell to below CHF 6 billion for the first time in more than two years, but the bank did well to limit the impact of this on the bottom line to a great extent by slashing costs.

The biggest aspect of Credit Suisse’s revamped strategy for the future is its plan to raise CHF 6 billion ($6.3 billion) in fresh equity in two phases: the issuance of new shares worth CHF 1.35 billion ($1.4 billion) to qualified investors, and a rights offering worth CHF 4.7 billion ($4.9 billion) to existing shareholders. ^[2] The bank also aims to slash the size of risk-weighted assets in its investment banking division by 20% in a bid to improve returns, and will be investing as much as CHF 1.5 billion ($1.56 billion) over the next three years to increase its presence in Asia and to expand its cornerstone wealth management business. The proposed changes are likely to save the bank as much as CHF 3.5 billion in gross expenses by the end of 2018.

Investors were still not thrilled, though, and Credit Suisse’s shares dropped nearly 4% lower over trading on Wednesday, October 21. After all, the huge equity issuance would represent a sizable dilution to investor holdings in the bank. But considering Credit Suisse’s pledge to return between CHF 9.2 billion to CHF 10 billion in cash to investors by 2020 – representing cash returns which are roughly double what the bank has returned in the last three years on average – we stick to our $27 price estimate for Credit Suisse. This is about 10% above the current market price.

See our complete analysis of Credit Suisse here

Investment Banking Arm Reports Q3 Loss 

Credit Suisse’s investment banking division reported total revenues of less than CHF 2.4 billion ($2.5 billion) in Q3 2015 – 29% below the figure reported a year ago and 30% lower than what it generated in the previous quarter. In fact, this was the worst performance by the division since the exceptionally poor Q4 2011. Almost all of the decline came from a reduction in trading revenues, which fell from around CHF 2.5 billion in Q2 2015 and Q3 2014 to CHF 1.8 billion in Q3 2015. The FICC (fixed income, currency and commodities) trading revenues were hurt the most, with the figure falling to just CHF 674 million ($700 million). This represents a 45% reduction quarter-on-quarter and a 53% fall year-on-year.

Despite Credit Suisse’s efforts to shrink its non-interest expenses by 11% compared to Q2 2015 as well as Q3 2014, the sharp decline in revenues for the investment banking operations meant that the division ended up with a loss for the third quarter. While the loss this time around was more a function of an overall weak period for trading and underwriting activities, these operations have had a particularly poor run over recent years. This is evident from the fact that Credit Suisse reported a pre-tax margin figure of more than 30% for its investment banking arm in just one quarter over the last five years (in Q4 2013) – a track record that is much worse than that of its peers. Credit Suisse has already drawn a lot of criticism from investors over recent years for its decision to maintain a full-fledged investment bank despite its capital-intensive nature. The announced plan to shrink the asset base by 20% in the near future is expected to have a positive impact on operating margins as shown in the chart below.

Wealth Management Had Decent Quarter, Focus On Asia Should Drive Growth

Credit Suisse’s cornerstone wealth management business reported revenues of just over CHF 2 billion ($2.1 billion) for the third quarter of 2015 – a 7% reduction compared to the figure for the previous quarter. The decline can be traced to a reduction in transaction- and performance-related revenues for the division. This was largely expected, given weak global economic indicators and the unfavorable exchange rate movement in Q3.

Notably, Credit Suisse reported strong inflows from around the world over the period. The wealth management division reported total inflows of CHF 10.5 billion – making it one of the best quarters in this regard over recent years. As has been seen over recent quarters, a bulk of the inflows were witnessed in the Asia Pacific region (CHF 3.8 billion), followed by inflows of CHF 2.9 billion in Switzerland and CHF 2.5 billion in the EMEA region. Market valuations and negative currency movements hurt the bank’s total asset base, though, which shrank for the third consecutive quarter to end Q3 at below CHF 800 billion from CHF 874.5 billion at the end of Q4 2014.

With Credit Suisse showing its strength in Asia over recent years, its decision to increase its focus in the region will be an important source of value in the future.

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1. Third Quarter 2015 Results, Credit Suisse Investor News, Oct 21 2015 [↩]
2. The Board of Directors of Credit Suisse Group AG proposes two share capital increases to further strengthen the Group’s capital base, Credit Suisse Press Releases, Oct 21 2015 [↩]