Credit Suisse Stock: We Are Still Neutral (NYSE:CS)

Last year, we really analyzed Credit Suisse’s developments (NYSE:CS), and in the Seeking Alpha community, we were the first ones to be skeptical about what was going on in the Swiss bank. Our initiation of coverage was a publication called Valuation Is Less Important Than Earnings and then we followed up on the bank’s Three Profit Warning releases with another note emblematically titled: We Told You So. When in July 2022, Ulrich Koerner, Credit Suisse’s new CEO started his ‘mission‘ and decided to spend several weeks reassuring key clients and investors about the Swiss bank’s capital strength and liquidity position, we were very cautious and we were already discounting a potential capital increase. In August, Moody’s downgraded the company and has maintained a negative outlook ever since. Looking at the numbers, the liquidity coverage ratio (a measure that aims to ensure that a bank maintains an adequate level of high-quality liquid assets that can be converted into cash to meet its liquidity needs) stands at 191%. This ratio is among the best-in-class within the sector, and it is also coupled with a high-quality liquid assets portfolio of CHF 235 billion. Therefore, we can conclude that the bank’s liquidity position is very solid.

However, here at the Lab, in the short term, we should note that widening credit spreads could exacerbate market fears, cause negative press coverage and damage counterparty confidence, as well as drive up borrowing costs. On the core business, aside from the usual problem in the investment banking division, the company is currently losing assets under management flow (not considering the reputational damage). Speaking of numbers, the Swiss bank disclosed that it continued to experience net outflows of assets for a total consideration of 6% in Q3. In addition, this negative trend continued into October. As a result, the group expects to post a loss of CHF 75 million linked to the sale of its stake in the British technology platform, Allfunds group, while lower deposits and reduced assets under management are expected to lead to a decline in net interest income (and recurring fees and commissions), which the bank said could lead to a loss for its wealth management division in the fourth quarter.

Credit Suisse announced that it has entered into a master and exclusivity agreement to transfer a significant portion of its securitized products business and other related financial assets to an investor group led by PIMCO and Apollo Global Management. As a result, the bank expects to maintain a pre-Basel III reform CET 1 ratio of at least 13% in the 2023-2025 period with a projected 2025 pre-Basel III reform CET 1 ratio above 13.5% (as a reminder the minimum requirement for the regulators is set at 12.5%). Looking at Q4, Credit Suisse foresees the investment bank and the group posting a substantial pre-tax loss of approximately CHF 1.6 billion. For this reason, in our projection, we are estimating a target cost reduction of 15% or CHF 2.5 billion by 2025 with a reduction of CHF 1.2 billion in 2023. Finally, layoffs of 5% of the bank’s workforce are underway along with reductions in “other costs not related to compensation”.

A slimming cure is urgently needed, and the CEO said that the plan “will fundamentally restructure the investment bank, strengthen capital and accelerate our cost transformation”. This is a profound change and Credit Suisse’s goal is to allocate two-thirds of the group’s capital to the wealth management, asset management, and banking divisions in Switzerland.

Conclusion and Valuation

As already mentioned, the CHF 4 billion capital increase was already priced in by the market, but our main concern is the low ROTE target for 2025, which seems to lack ambition. By 2025, the company’s goal is to achieve a return on tangible equity of around 6% compared to the consensus estimate of 6.4%. In our numbers, we are more in line with the bank forecast. Part of the logic of capital reallocation is to drive a revival of profitability, but this cannot be estimated if the prospects for returns remain so low. The stock looks cheap, even after dilution, but there is likely to be significant execution risk over the next few months, so this remains a high-risk investment. Credit Suisse’s market capitalization has declined to CHF 12 billion versus a market value of over CHF 30 billion as of March 2021. This is again a no-go opportunity and we reaffirm our neutral valuation in line with the bank’s current stock price. In our banking universe coverage, here at the Lab, we continue to prefer Credit Agricole and ISP in particular.

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