Credit Suisse’s Deferred Tax Write-Off To Push 2017 Results Into The Red

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Credit Suisse (NYSE:CS) will incur a one-time accounting charge of CHF 2.3 billion (~$2.3 billion) in the fourth quarter of 2017 as the Swiss banking giant writes off the value of its deferred tax assets in the U.S. as a direct result of the U.S. tax reform. While this means that the bank will end the year with a loss for the fourth quarter after posting small profits for each of the first three quarters, the magnitude of the loss is likely to end up dragging the figure for full-year 2017 into the red. This would mean a loss for the Swiss bank for the third consecutive year.

However, we believe that the one-time loss for this quarter is a small hiccup for Credit Suisse, which generates a sizable chunk of its revenues in the U.S. While the lower corporate tax rates in the U.S. will boost profits for the bank’s wealth management as well as investment banking operations in the country, the bank is also expected to gain in the long run from an increase in activity level across the U.S. from the improved tax regime.

Although tax provisions being introduced under the new base erosion and anti-abuse tax (BEAT) can potentially nullify some of these gains, we believe that the net effect on Credit Suisse’s earnings going forward will be positive. We are currently in the process of updating our price estimate for Credit Suisse’s shares.

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See our complete analysis of Credit Suisse here

Credit Suisse has historically benefited from the low corporate tax levels in its home market of Switzerland, and reported effective tax rates in the 15-20% range over 2005-12. The figure was unusually high in 2013-14 as it incurred billions in legal and settlement costs that were not tax-deductible, and we show the figure for 2015 and 2016 as zero as the bank reported a net loss for each of these years.

Credit Suisse reported net deferred tax assets in excess of CHF 7.2 billion (~$7.2 billion) at the end of Q3 2017, with nearly two-thirds (CHF 4.8 billion) of this figure being attributed to deductible temporary differences in tax rates applicable. With the U.S. Tax Act slashing corporate tax rates from the existing 35% to just 21%, a sizable chunk of these deductible temporary difference in U.S. deferred tax assets had to be written off. This is what led to the CHF 2.3 billion accounting charge that Credit Suisse will incur in Q4 2017.

Notably, the bank’s net income figure over the first nine months of 2017 was CHF 1.1 billion. As the fourth quarter of the year is a seasonally weak period for the banking industry, and as poor trading activity for Q4 will only weigh on the top line further, the charge-off should result in Credit Suisse ending up with a net loss for full year 2017 as well. The bank had reported a loss for 2015 as well as 2016 due to heavy legal and restructuring costs. But the accounting-related loss is not expected to have a material impact on Credit Suisse’s regulatory capital ratios.

That said, the overhaul in U.S. taxes could benefit the country’s economy as a whole, and should have a positive impact on Credit Suisse’s U.S. operations in the future. While this will help profits for the bank’s wealth management as well as investment banking divisions, the bank points out that its advisory and underwriting units are likely to benefit the most. You can see how an increase in Credit Suisse’s equity underwriting fees affects our price estimate for the bank’s shares by modifying the chart below.

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