Up 80%, Credit Suisse Stock Has Limited Upside

We believe that Credit Suisse stock (NYSE: CS) has a limited upside potential of 14% in the near term. CS trades at $12 currently and it has lost 10% in value year-to-date. It traded at a pre-Covid high of $14 in February and is 12% below that level now. Also, CS stock has gained 79% from the lows of $7 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. The stock is leading the broader markets (S&P 500 is up about 60%), as investors are positive about the growth in Credit Suisse’s Investment Bank segment which includes both Investment Banking and Sales & Trading businesses – the bank has reported a 5% y-o-y growth in the cumulative revenues for the first three quarters. 

That said, CS third-quarter results missed the consensus estimates. It mainly suffered due to a 10% drop in wealth management revenues, partially offset by an 11% rise in the investment bank segment. However, as the economy inches towards normalcy, the lower interest rate environment and negative GDP scenario would improve, benefiting the wealth management revenues. Further, the bank is likely to re-start its share buyback program from FY 2021. After a significant rise in CS stock since late March, we believe that the stock has a limited upside in the near future. Our conclusion is based on our detailed analysis of Credit Suisse’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 60% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how CS and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Credit Suisse vs S&P 500 Performance Over 2007-08 Financial Crisis

CS stock declined from levels of around $64 in October 2007 (the pre-crisis peak) to roughly $23 in March 2009 (as the markets bottomed out), implying that the stock lost around 65% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, CS recovered strongly post the 2008 crisis to about $47 in early 2010 – rising by 104% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Credit Suisse’s Fundamentals in Recent Years Look Strong

Credit Suisse revenues fell 7% from $24.7 billion in 2015 to $22.9 billion in 2019. However, the company’s net income increased from -$3.1 billion to $3.5 billion over the same period, mainly driven by a $3.9 billion goodwill impairment charge in the fourth quarter of 2015. The company’s Q3 2020 revenues were 2% below the year-ago period, and its EPS figure decreased from $0.34 to $0.20.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $14 (14% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $14 level Credit Suisse’s stock was at before the coronavirus outbreak gained global momentum.

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