[Updated 03/05/2021] Credit Suisse update
Having gained around 100% since the March 23 lows of the last year, at the current price near $14 per share, we believe Credit Suisse’s stock (NYSE: CS) has some more upside potential. CS, the second-largest Swiss bank after UBS, has seen its stock increase from $7 to $14 off last year’s March bottom compared to the S&P 500 which increased almost 70% – the stock is leading the broader market and has gained 31% over the last twelve months. The investors were somewhat cautious about the impact of the lower interest rate environment and Covid-19 crisis on the bank’s top-line. However, growth in Credit Suisse’s Investment Bank segment, which includes both Investment Banking and Sales & Trading businesses, lifted up investor confidence in the stock. (Note – Credit Suisse originally reports in CHF (Swiss Francs), the same has been converted to USD for ease of comparison).
Credit Suisse reported a rather soft performance in Q4 2020, with the company falling short of revenues and earnings consensus estimates. Overall, Credit Suisse reported revenues of $5.8 billion, down 9% year-over-year while the EPS figure plunged from $0.35 to -$0.16 due to higher provision for credit losses and an increase in operating expenses. Similarly, CS’ full-year 2020 revenues grew 4% y-o-y to $23.85 billion, mainly due to a 98% growth in trading revenues, partially offset by an 11% drop in net interest income due to interest rate headwinds.
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Although growth in sales & trading and investment banking revenues coupled with the increase in Assets under Management benefited Credit Suisse’s top-line in 2020, interest rate headwinds, lower consumer spending, a build-up in provisions for credit losses, and a drop in new loan issuance negatively impacted its revenues. The sales & trading and investment banking revenues grew due to higher trading volumes and underwriting deals respectively, driven by economic uncertainty, which is expected to normalize with improvement in the economy. Further, low-interest rates are expected to continue for some time. That said, recovery in consumer demand and fund inflows are likely to boost Credit Suisse’s growth in the subsequent quarters. On similar lines, improvement in the economy will likely result in a favorable decrease in provisions for credit losses, increasing the bank’s profitability. Overall, Credit Suisse’s revenues are expected to improve in the short term. Additionally, Credit Suisse’s P/E multiple changed from just below 14x in 2018 to around 11x in 2020. While the company’s P/E is about 12x now, this leaves some upside potential when the current P/E is compared to levels seen in the past years – P/E multiple of around 14x at the end of 2018. Our dashboard “What Factors Drove 28% Change In Credit Suisse Stock Between 2018-End And Now?” provides the key numbers behind our thinking.
[Updated 01/06/2021] Be Patient With Credit Suisse Stock
After close to 100% gain since the March 23 lows of the last year, at the current price of $13 per share we believe Credit Suisse Stock (NYSE: CS) has some more room to go. Credit Suisse, the second-largest Swiss bank, has seen its stock rally from $7 to $13 off the recent bottom compared to the S&P which moved around 65% – the stock is leading the broader markets. The stock growth could be attributed to growth in Credit Suisse’s Investment Bank segment which includes both Investment Banking and Sales & Trading businesses. While the bank did report soft performance in Q3 2020 – with the company falling short of consensus estimates and earnings, its cumulative nine months revenues of $16.5 billion were 2% above the year-ago period, mainly driven by a 133% jump in trading revenues (revenue figures were originally reported in CHF (Swiss Francs), the same has been converted to USD for ease of comparison).
Credit Suisse’s stock has partially reached the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as its revenues have increased during the Covid-19 crisis and its valuation implies it has further to go.
The company’s revenues grew around 10% from $20.9 billion in 2018 to about $22.9 billion in 2019, which translated into a 70% increase in the net income figure over the same period. This unusual increase was due to restructuring expenses incurred in 2018 and lower compensation cost as a % of revenues in 2019. Overall, the net income margin increased from 9.8% in 2018 to 15.2% in 2019.
While the company has seen steady growth in EPS over 2018-2019, its P/E multiple has decreased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 21% Change In Credit Suisse Stock Between 2018-End And Now?” has the underlying numbers.
Credit Suisse’s P/E multiple has changed from just below 14x in FY 2018 to around 10x in FY 2019. The company’s P/E is just below 10x now. This leaves some space for upside when the current P/E is compared to levels seen in the past years – P/E multiple of around 14x at the end of 2018.
So Where Is The Stock Headed?
Credit Suisse’s growth over the first nine months of 2020 was mainly due to the strength in its investment banking arm – cumulative nine months investment banking revenues were up 20% y-o-y. While the sales & trading benefited from higher trading activity in the market, the investment banking business enjoyed higher underwriting deal volume. That said, as the economic conditions improve, we expect both the segment revenues to normalize. On the flip side, Credit Suisse’s wealth management segment has suffered in the last year due to a lower interest rate environment, a build-up in provisions for credit losses, a drop in assets under management, and lower performance fees. However, as the economy inches towards normalcy, the lower interest rate environment and negative GDP scenario are likely to improve. Further, provisions for credit losses are expected to see some favorable drop coupled with positive fund inflows in the asset management business. This is likely to benefit the wealth management revenues. Additionally, the bank is likely to re-start its share buyback program in FY 2021. Overall, Credit Suisse’s stock is expected to see some positive movement in the near term.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
While Credit Suisse Stock is worth considering, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Microsoft vs. Emergent Biosolutions shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.