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Investment Overview for Credit Suisse (NYSE:CS)
Below are key drivers of Credit Suisse's value that present opportunities for upside or downside to the current Trefis price estimate for Credit Suisse:
Bonds, Currencies & Commodities Trading
- Yield on FICC Trading Assets: Credit Suisse's trading yield has been around 3.5% in recent years, after recovering from lows of -2.6% in 2008 at the peak of the global economic crisis. While we estimate yield figures to remain around 3.5% going forward, should the division see a better than expected performance in coming years, the yield could increase to 4.5% over the Trefis forecast period. If that were to occur there would an upside of nearly 6% to the Trefis price estimate.
- Investment Banking EBT Margin: Margins for Credit Suisse's investment banking operations have improved considerably since the downturn to their current levels of roughly 30%. We estimate the EBT margin to remain around this level over the Trefis forecast period. However, if increased competition in the bond-trading industry coupled with stricter capital requirements weigh on profits, then margins could fall to 25% by the end of this period. This represents a 7% downside to the current price estimate.
- Assets under Management - International Clients: Credit Suisse's cornerstone wealth management business aims to grow over coming years by focusing on developing nations. The international business wealth management unit has reported a steady increase in the size of assets under management to reach $518 billion by the end of 2014. Although negative foreign exchange movements and a sharp decline in securities valuation over the second half of 2015 led this figure lower to $457 billion in 2015, we expect these assets to grow at roughly 3% annually over our forecast period. If these assets grow at an annual rate of 6% over this period, then this would result in a 5% upside to the Trefis forecast price.
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.
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 twice 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.
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.
Stringent Swiss capital requirement norms will negatively impact the bank's return on equity figures
Swiss regulatory requirements are the strictest in the world when it comes to core capital ratios and leverage ratios for the country's two biggest banks: UBS and Credit Suisse. Both these banks have put in considerable effort over the years to revamp their business model to comply with the strict norms, but they have also had to raise a substantial amount of fresh capital. With earnings likely to grow at a modest pace over coming years, the higher capital base are likely to result in lower return on equity (ROE) figures for the Swiss banks compared to their other global banking peers.
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 reduction in total trading revenues from the U.S. for the bank.
Economic Recovery to Stimulate Wealth Management
As economic conditions eventually improve, we expect that investors' risk appetites will also increase, which should drive investment and demand for wealth management services. Long term trends, including the ongoing 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 assets under management.
How 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.
See more on: DCF Methodology
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