The bank suffered a loss of CHF 4.4 billion in Q1 2021 due to the Archegos Capital crisis -- the U.S based hedge fund collapsed after taking on too much risk. It reported total revenues of CHF 22.7 billion for full-year 2021.
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:
Founded in 1856, Credit Suisse provides companies, institutional clients, and high-net-worth private clients worldwide and retail clients in Switzerland with advisory services and financial products. It is the second-largest Swiss bank after UBS.
Credit Suisse's trading assets for bonds, currencies, and commodities are nearly 10% higher than its trading assets for equities & derivatives. Although the bank has chosen to reduce its focus on the trading business in the past few years, we estimate better yields from bond trading compared to the equity trading business in subsequent periods. This makes the bond trading division more valuable for Credit Suisse than equities & derivatives trading.
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 more significant portion of our price estimate for Credit Suisse's stock.
The bank's assets under management (AUM) for international clients is more than 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.
With GDP and per capita income of emerging markets increasing steadily, there is an increasing demand for capital from companies in these markets to support the growing purchasing power of the people. Also, the integration of these markets with the global economy has led to a shift 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.
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 the coming years, the higher capital base is expected to result in lower return on equity (ROE) figures for the Swiss banks compared to their other global banking peers.
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.
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. However, the outbreak of coronavirus has adversely impacted economic recovery. The current impact of COVID-19 cannot be ascertained, but it will take at least a couple of quarters before the economic conditions improve.