A Closer Look At Credit Suisse’s Fundamental Valuation

Credit Suisse (NYSE:CS) recently delivered its first annual net profit since 2014, after completing its restructuring program in 2017. There was only a marginal increase in the bank’s annual revenue for 2018, but it was able to reduce its operating expenses by approximately 9% year-over-year, leading to overall profitability. Credit Suisse’s Wealth Management division (constituting 41% of total revenue) continued to thrive, as its efforts to refocus its business model on its global wealth management operations yielded results. However, the bank’s revenue from its Investment Banking division shrunk, as global market conditions deteriorated over the second half of 2018.

We expect Credit Suisse to build on its good financial performance in 2018, as the bank remains focused on growing its Wealth Management operations, particularly in the Asia-Pacific region. The bank also remains on track to scale down its trading operations, as evident from the consistent decline in the bank’s trading assets post-2008 economic downturn. However, escalating trade tensions between the U.S. and China, rising (normalizing) interest rates and slowing economic growth are all likely to put pressure on the bank’s performance, particularly the Investment Banking business. We currently have a price estimate of $15 per share for CS, which is ahead of the current market price. We have summarized our full-year expectations for CS, based on the company’s guidance and our own estimates, on our interactive dashboard Is Credit Suisse Fairly Valued?. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Financial Services company data here.

Impact Of Rising Inflation

The Federal Reserve increased interest rate multiple times in 2018, and is expected to further increase rates in 2019 (though there is some uncertainty related to future rate hikes) to keep a check on inflation. Further interest rate hikes could lead to the USD strengthening with respect to the CHF, thereby adversely impacting the value of the bank’s international investments and interest income. Trading revenues will also likely shrink, though emerging market equities are expected to recover in 2019, presenting suitable investment opportunities for the bank.

Wealth Management Will Continue To Thrive

Credit Suisse’s Private Banking division saw its revenues increase to CHF 8.5 billion in 2018 – an increase of approximately 5% from 2017. Although the bank’s total assets under management declined to CHF 1.35 trillion in 2018, its Asia-Pacific arm continued its growth in 2018, with net inflows of CHF 5 billion. Global wealth grew at 4.6% in 2018, higher than the average post-2008 economic crisis. With the share of emerging markets increasing in terms of global assets, we expect the bank to increase its presence in Asia and some European emerging economies, leading to growth in revenues.

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