Why 2019 Is Likely To Be Credit Suisse’s Most Profitable Year Since 2015

CS: Credit Suisse logo
Credit Suisse

Credit Suisse’s (NYSE: CS) has been extremely successful in reducing costs over the years, especially after the successful completion of its restructuring program in 2017. The second-largest Swiss bank has been able to slash costs across all heads, creating CHF 3.9 billion in savings since 2016. This has been helpful in improving its earnings margin (which is revenues net of all expenses expressed as a percentage of revenues) from -12% in 2016 to an estimated 14.8% in 2019 thanks to a combination of stable revenues and lower expenses. This should make 2019 Credit Suisse’s most profitable year since 2015. Trefis highlights trends in Credit Suisse’s Expenses over the year along with our expectations for 2019 in an interactive dashboard, key elements of which are discussed below.

Notably, Compensation & Benefits (which represents employee salaries) are expected to be CHF 9.9 billion in 2019 – making up 54% of the bank’s CHF 18.2 billion in estimated Total Expenses for 2019. While the bank spends the most on salaries, Operating Expenses (including general and administrative, commission, and restructuring and other charges) are expected to contribute ~37% to the bank’s total expected costs in 2019.

  • Credit Suisse’s total expenses have declined 33% since 2015, falling from CHF 26.8 billion to CHF 18.9 billion in 2018 and are expected to decline further in 2019. Restructuring and other expenses have been the largest contributor to this decline, with expenses falling from CHF 4.1 billion in 2015 to just CHF 626 million in 2018.
  • Credit Suisse’s total expenses are expected to decline 3.5% in 2019 due to a 11.4% reduction in Operating Expenses.
  • Moreover, the bank’s total expenses as % revenue have declined from 112% in 2015 to nearly 90% in 2018 and this metric is expected to be around 85% in 2019.

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Breaking Down Credit Suisse’s Total Expenses

Compensation & Benefits

  • Compensation Expense includes fixed components, such as salaries, benefits and the amortization of share-based and other deferred compensation from prior-year awards, and a discretionary variable component (or bonus).
  • Compensation & Benefits is the largest expense driver, accounting for nearly 51% of the bank’s total expenses in 2018.
  • Compensation & Benefits have steadily declined over the last few years, falling from CHF 11.5 billion in 2015 to CHF 9.6 billion in 2018 primarily driven by lower salaries and variable compensation.
  • However, we expect this metric to increase to by 2.7% to CHF 9.8 billion, representing 46.3% of total revenues of CHF 21.4 billion.

Operating Expenses

  • Credit Suisse’s Operating Expenses include general and administrative (G&A), commission, and restructuring and other charges. Operating expenses have declined 47% since 2015, falling from CHF 14.3 billion in 2015 to CHF 7.7 billion in 2018, led by a CHF 2.8 Billion decrease in G&A Expenses and CHF 3.5 Billion decrease In restructuring and other expenses.
  • Credit Suisse’s restructuring and impairment expenses have plunged 85% falling from CHF 4.2 in 2015 to just CHF 0.6 billion in 2018. This figure was unusually high in 2015 due to a goodwill impairment charge of CHF 3.8 billion incurred in Q4 2015.
  • We expect restructuring charges to be nil in 2019 as the bank restructuring plan is complete and is not expected to incur any additional goodwill impairment.
  • Moreover, the bank’s G&A expenses are also on a declining trend, with the expenses witnessing a decline of CHF 2.8 billion over 2015-18. The decrease in G&A expenses was primarily due to lower professional services and lower litigation provisions.

Provision & Other Charges

Income Taxes

  • Credit Suisse’s income tax expense has increased from CHF 0.5 billion in 2015 to about CHF 1.4 billion in 2018. The bank’s effective tax rate was nil over 2015-17 as the bank incurred losses over this time-frame
  • We expect the bank’s effective tax rate to be around 30% in 2019.

We expect Credit Suisse’s adjusted EPS for full-year 2019 to be around CHF 1.23. Using this figure with our estimated forward P/E ratio of 12.4x and a CHF-USD exchange rate of 1, this works out to a price estimate of $15 for Credit Suisse’s stock – roughly 15% ahead of the current market price.

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