Credit Suisse (NYSE:CS) provides advisory services and financial products to companies, institutional clients and high-net-worth private clients worldwide, as well as retail clients in Switzerland. It competes with UBS (NYSE:UBS), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS).
Our price estimate for Credit Suisse stands at $47.46, nearly 20% ahead of market price.
CS did well vs. its peers during the downturn due to its more conservative portfolio, geographic diversity and heavy reliance on wealth management, which limited exposure to asset backed securities. In general, across the financial services industry, wealth management performed better than investment banking and sales & trading during the downturn.
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Wealth Management AUM Poised to Increase
We estimate that the Wealth Management division accounts for around 47% of our $47.46 price estimate for Credit Suisse’s stock. In 2009, the asset under management (AUM) for the Wealth Management division totaled around $840 billion, of which around $300 billion came from Swiss clients, $440 billion from international clients (those outside Switzerland) and $100 billion from corporate & institutional clients in Switzerland.
During the recent economic downturn, the AUM for Swiss clients fell from $360 billion in 2007 to $280 billion in 2008 and that for international clients fell from$460 billion in 2007 to $360 billion in 2008. This was largely due to a fall in returns across asset classes impacting the demand for wealth management services, with investors pulling their money out and parking them in safe asset classes (low yield sovereign treasury bonds, fixed deposits, etc).
However, with the economic environment improving in 2009, the AUM for Swiss clients and international clients increased to $300 billion and $440 billion respectively. We expect the AUM to further increase, with the economic recovery stimulating investments and Credit Suisse’s continued expansion into Asia Pacific increasing its customer base.
AUM – Swiss Clients
AUM – International Clients
Consumption and savings patterns are changing in the developed and emerging markets. The West is more financially strapped while emerging economies, particularly in Asia, are growing faster as well as saving and spending more. As a result, we expect that the demand for wealth management services should grow faster in Asia than the West. We currently forecast the AUM for international clients to increase to $600 billion by 2017.
Upside to CS Stock Value from Wealth Management Operating Margins
Credit Suisse’s operating margin on wealth management for international clients decreased from 48% in 2007 to 26% in 2009, largely due to falling returns during the global economic slowdown. We forecast that by 2017, this metric could approach 45%, the historical average before the global financial crisis.
However, the strong economic rebound in Asia Pacific is leading to fast improving returns across riskier asset classes (like equities, corporate bonds and other fixed income products of emerging markets) in addition to increasing investor risk appetite. These factors can lead to an upside to our current forecasts. If Credit Suisse can restore its wealth management operating margin for international clients to the historical average of around 45% by 2013 and then slightly improve it to 50% by 2017, it would mean an additional 5% upside to our current price estimate for Credit Suisse’s stock, which already stands about 20% ahead of market price.
Drag the trend-line in the chart below to see the impact of various international client wealth management operating margin scenarios on Credit Suisse’s stock value.