After Revamping Its Wealth Management Arm, Credit Suisse Now Focusing On Equity Trading

by Trefis Team
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Credit Suisse
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Credit Suisse (NYSE:CS) recently reported better-than-expected results for the third quarter of the year, and considering the fact that its cornerstone wealth management division drove profits for the period thanks to a strong inflow of client assets, it appears that the multi-year reorganization plan the Swiss banking giant started in 2015 is having the desired effect. The bank’s reorganization plan hinged on growing its global wealth management operations (with focus on Asia in particular) while shrinking its investment banking operations in a bid to improve profitability while also meeting capital ratio requirements (see Credit Suisse’s Mixed Q3 Results Followed By Plans To Overhaul Operations, Capital Structure).

With the turnaround in Credit Suisse’s wealth management division apparent, the bank seems to have shifted its focus to equity trading now. That would explain the flurry of recent hirings by the bank’s equity trading operations over recent weeks. This is a logical move, in our view, as the equity trading business is not as capital-intensive as debt trading, and also because it is less volatile compared to its counterpart. In fact, it is for these reasons that peers UBS and Morgan Stanley have shifted their focus almost entirely to equity trading over recent years.

Credit Suisse has done well in recent quarters to keep operating expenses in check, and we expect it to meet its target of reducing non-interest expenses to below CHF 17 billion for 2018. However, we also believe that the bank will continue to face some revenue headwinds from negative interest rates in its home market of Switzerland. Also, the bank will have to remain conservative about its capital return plans in the near future as its common equity tier 1 (CET1) capital ratio figure of 13.2% remains below its mandatory requirement of 14.3% effective early 2019. In comparison, rival UBS’s CET1 figure is a more comfortable 13.7%. Because of this, we stick to our $16 price estimate for Credit Suisse’s shares, which is around the current market price.

See our complete analysis of Credit Suisse here

The table above summarizes the factors that aided Credit Suisse’s pre-tax profit figure for Q3 2017 compared to the figures in Q3 2016 and Q2 2017. The notable reduction in Trading & Investment Banking was largely expected, as global trading activity fell notably for the period due to low volatility – hurting securities trading revenues across the industry. While investment banking operations are seasonally depressed over the third quarter, a weaker Swiss franc also had a negative impact on Credit Suisse’s advisory & underwriting fees over comparative periods. This is evident in the chart below, as each of the bank’s investment banking units reported lower revenues compared to Q3 2016 as well as Q2 2017.

However, Credit Suisse has been visibly ramping up its investment banking operations over recent quarters by adding people at various levels. This includes some changes high-level management additions to its equity trading unit, as the total headcount for its Global Markets and Investment Banking & Capital Markets divisions increased sequentially from 14,750 to 15,020. We expect equity trading revenues to benefit from the bank’s renewed focus going forward.

The performance of Credit Suisse’s cornerstone wealth management business has been commendable, especially since it has been under pressure over recent years due to Switzerland’s status as a tax haven diminishing among private clients. While the top line suffered from the impact of negative interest rates in Switzerland, and also from unfavorable exchange rate movements, the bank reported healthy inflows of more than CHF 10.4 billion across its global wealth management units.

The table above summarizes the factors that contributed to the change in size of total assets under management (AUM) (consolidated across all operating divisions) for Credit Suisse from the end of Q3 2016 and Q2 2017. As seen here, the bank’s wealth management and asset management arms have seen considerable inflows over the last twelve months. While the Corporate & Institutional banking unit had sizable net outflows, this was primarily because of a single CHF 13.1 billion redemption. We believe that the shifting preference of large institutional investors towards low-cost ETFs from traditional offerings like mutual funds has contributed to additional outflows.

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