After Strong Q4, Credit Suisse’s Reorganization Plan Should Unlock More Value In 2018

Credit Suisse’s (NYSE:CS) stock rallied by nearly 6% over trading on Wednesday, February 14, despite the Swiss banking giant reporting its third straight annual loss, as gains from its ongoing reorganization plan boosted its operating performance for the fourth quarter of 2017. Investors were quick to overlook the loss – as it could be largely attributed to a one-time accounting charge of CHF 2.3 billion linked to a revaluation of its U.S. deferred tax assets – focusing instead on the better-than-expected performance of its operations in the Asia-Pacific region. As Credit Suisse’s multi-year reorganization plan aims for strong growth in its global wealth management operations with specific focus on Asia, the strong results demonstrated the effectiveness of the plan.

More importantly, Credit Suisse’s efforts to cut costs while working its way through legacy legal issues over recent years also helped the bank report operating costs of less than CHF 19 billion for full-year 2017. This compares to an average of CHF 22.6 billion over 2012-16, and is the first time this figure has fallen below CHF 20 billion since 2004.

While Credit Suisse’s investment banking performance for the year was somewhat forgettable, it should be noted that this was primarily due to the negative impact of low capital market volatility on its securities trading revenues. This trend was seen across the industry over the second half of 2017, and has reversed somewhat over recent weeks. Taken together with more gains from the bank’s cost cutting efforts, we expect profits for the investment banking division to rebound in 2018. The upbeat outlook for Credit Suisse across its operating divisions prompted us to raise our price estimate for Credit Suisse’s shares from $16 to $19.

See our complete analysis of Credit Suisse here

Healthy Growth In Assets Under Management Helped Results

Credit Suisse’s Total Assets Under Management (AUM) grew to CHF 1.38 trillion at the end of 2017 from CHF 1.25 trillion a year ago – a 10% jump. Growth was primarily driven by strong inflow of assets into the bank’s International Private Banking operations (especially Asia-Pacific) and also its Corporate & Institutional Clients division. These divisions should drive growth in AUM over 2018 as well.

Industry Headwinds Hurt Trading Revenues, Trading Desks Poised For Growth in 2018

Credit Suisse has made a flurry of hirings to strengthen its equity trading operations over recent months – indicating its intention to regain lost ground in the global equity trading industry. Also, an increase in market volatility globally should help trading revenues for full-year 2018

Cost-Cutting Efforts To Help Boost Profitability of Revamped Business Model

Credit Suisse reported an improvement in operating margins across its divisions – with gains for its investment banking arm standing out in particular. While ongoing cost-cutting efforts are expected to boost margins for all divisions in 2018, a recovery in securities trading revenues should lead to the investment banking operations witnessing the largest gains yet again in 2018