Credit Suisse Targets Significant Cost Reductions By 2018, Near-Term Earnings To Remain Depressed

Last week, Credit Suisse (NYSE:CS) announced that it is aiming for an additional CHF 1 billion in cost reductions over the next two years – raising its goal of slashing net recurring expenses over 2016-18 from the current target of CHF 3.2 billion to CHF 4.2 billion. ^[1] The second largest Swiss bank hopes to achieve the new target, primarily by investing in an advanced technology platform that will improve the efficiency of the bank’s compliance operations – allowing it to add new customers with a smaller employee base. ^[2] However, Credit Suisse does not expect any improvement in earnings over 2017-18 from the cost cutting momentum, as headwinds for its international wealth management operations and depressed activity levels for its investment banking unit in the Asia-Pacific region are expected to weigh on the bank’s top line. In fact, the recently revealed cost cutting plan is in part an attempt by the bank to maintain profit margins over a period that is expected to be slow for several key growth units.

Credit Suisse has put in considerable effort over recent years to streamline its business model while also working towards compliance with stringent Swiss capital requirement rules. Benefits of the bank’s large-scale reorganization plan, which began in earnest late last year, are already evident. We believe that the cost cutting measures should help Credit Suisse tide over the period of poor revenue generation in the near future, and can potentially boost long-term profits once the bank’s restructuring plan runs its course. Because of this, we stick to our price estimate of $16 for Credit Suisse’s shares. The price target is slightly above the current market price.

See our complete analysis of Credit Suisse here

The global banking industry has undergone significant changes since the economic downturn of 2008, as stricter regulatory requirements and fundamental changes in the securities trading market forced the world’s largest banks to make considerable changes to their business models. With Swiss regulatory requirements for the country’s largest banks – UBS and Credit Suisse – being steeper than those in any other country, the Swiss banks have had to commit themselves to a long-drawn restructuring process (see Swiss Banks Likely To Continue Shoring Up Capital As SNB Proposes Higher Leverage Ratio Requirement). While both banks decided to focus their long-term growth strategies around their wealth management operations, UBS implemented much bigger cuts to its investment banking operations compared to Credit Suisse, as the former shrunk its debt trading business to a fraction of its pre-2008 size. In contrast, Credit Suisse still maintains a smaller, but fully functional, debt trading arm.

Notably, one of Credit Suisse’s areas of focus as detailed in its reorganization plan last year was Asia (see Credit Suisse’s Mixed Q3 Results Followed By Plans To Overhaul Operations, Capital Structure). The bank announced plans to invest as much as CHF 1.5 billion over 2016-18 to increase its presence in Asia. However, the fragmented nature of the wealth management as well as investment banking industry in the region, the dominance of local players and slowing economic conditions there made it difficult for Credit Suisse to grow meaningfully in the region in 2016. This in turn triggered the need for Credit Suisse to implement additional cost cutting measures in order to meet its profitability targets for 2018.

Taken together with the original plan to slash CHF 3.2 billion in net recurring costs by the end of 2018, Credit Suisse’s newly announced CHF 1 billion cost-cutting plan aims to save CHF 4.2 billion in total annual costs for the bank – taking total operating costs to below CHF 17 billion from the (adjusted) figure of CHF 21 billion for 2015. Most of the gains are expected from a leaner investment banking division. You can see how changes to Credit Suisse’s investment banking margins impact our price estimate for the bank by modifying the chart below.

The changes in long-term strategy will have a sizable impact on Credit Suisse’s profit targets for 2018, though, as the bank reduced pre-tax income forecast for its Asia Pacific operations from CHF 2.1 billion to CHF 1.6 billion. Additionally, Credit Suisse also reduced the pre-tax income target for its international wealth management division (which includes all wealth management units globally except for Switzerland and Asia Pacific) from CHF 2.1 billion to CHF 1.7 billion. Taking into account the fact that the new profit targets include CHF 1 billion in gains from lower costs, this would imply that Credit Suisse expects a reduction of almost CHF 2 billion in total revenues from a mix of slow economic conditions in the region and the bank’s reduced focus there.

The chart below captures the size of assets under management for all of Credit Suisse’s wealth management operations outside Switzerland over the years. Credit Suisse’s reduced revenue forecast for the two divisions points to slower growth (and a possible reduction) in these assets in the near future.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:

1. Investor Day 2016, Credit Suisse Website, Dec 7 2016 [↩]
2. Credit Suisse to make further CHF1bn cost savings, SwissInfo.ch, Dec 7 2016 [↩]