Credit Suisse stock appears oversold
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Credit Suisse (NYSE:CS) has been plagued by several scandals, court proceedings, and failed investments. This is a very beaten up stock. The bank had reported its earnings on April 27. Revenue was roughly in line with last quarter. However, the net profit remained negative. But the higher the stock price is already, the more it is taken into account. I understand that the stock markets are falling right now and there is a possibility of a recession. But CS stock may be worth buying when “blood on the streets,
Credit Suisse earnings results
In short, the bank’s net revenue decreased only slightly compared to the fourth quarter of 2021, but decreased substantially compared to the first quarter of 2021. This was a result of low customer activity levels and the bank’s decision to reduce its operational risks.
Credit Suisse earnings presentation
Source: Earnings Presentation, Slide 17
Credit Suisse earnings presentation
Source: Credit Suisse’s earnings presentation, Slide 21
This can be well illustrated with the decline in the bank’s leverage risk which totaled $15 billion. Meanwhile, the bank’s CET1 ratio declined marginally but mostly due to currency exchange rate fluctuations.
Credit Suisse earnings presentation
Source: Credit Suisse Presentation, Slide 5
In the first quarter of 2022, the bank also suffered losses due to exposure to Russian assets. But most of the negative gains were due to the provisions of the court proceedings. Earlier, I wrote about some of the Credit Suisse related scams, bank lawsuits and the resulting compensation. Therefore, Credit Suisse reported higher operating expenses, up 26%, driven by a key litigation provision of CHF 653 million, increased cash accumulation for compensation due to normalized deferment levels and incremental investments. There was also a loss of CHF 353 million related to the fall in the value of its Allfunds investment. The influence relating to Russia was quite limited and totaled only 148 million CHF. The bank also provides CHF 58 million of provisions relating to the situation in Ukraine. The provision for the credit losses eventually included a 155 million CHF release related to Arcgos, a much older story that happened more than a year ago. On the positive side, the reported net revenue also includes real estate gains of CHF 164 million.
Compared to the same period a year ago, results for the first quarter of 2022 fell due to a decrease in the level of customer activity and volatile market conditions and a general decrease in risk appetite. Hedging volatility also had an impact due to a flattened yield curve.
Credit Suisse earnings presentation
Source: Credit Suisse Presentation, Slide 6
But I would also like to analyze the earnings results of the bank based on the performance of its departments. My colleague Wolf Report notes that Credit Suisse focuses heavily on its investment banking division rather than growing its profitable wealth management division. I agree that the investment banking department is very problematic these days and the wealth management department has done a lot better this quarter.
The asset management division’s decline was on account of lower transaction and placement revenues, losses related to investments. The department faced low performance and transaction fees as well as low recurring management fees. The bank’s management noted increasing investor bias towards passive products and continued margin pressures.
Meanwhile, the asset management department reported better results than the asset management department, even though it was strongly affected by low client activity levels and losses related to the situation around Ukraine.
But in my view the most promising results were shown by the Swiss bank. In this division, the bank’s investments in the Swiss Guard showed excellent performance and a 7% increase in recurring commissions and fees backed by a high level of assets under management (AUM). This is notable as recent events have had a generally negative impact on Credit Suisse’s AUM.
Credit Suisse earnings presentation
Source: Credit Suisse’s earnings presentation, Slide 20
As I mentioned earlier, the most successful region for Credit Suisse is Switzerland. Net new assets under management (NNA) increased by $2.1 billion. The second most successful region for the bank was Asia Pacific, with an increase of $1.8 billion in NNA.
The key challenge for Credit Suisse is the focus on flexible and profitable sectors and departments, namely Swiss Bank, Wealth Management and Asia Pacific Operations.
Outlook
The management of the bank feels that the economic future is not looking bright. The response to inflation concerns is a combination of the current geopolitical situation and the harsh stance of several central bankers. All this has led to high volatility and many clients are becoming more and more conservative this year.
Management noted in the first quarter of 2022 that the Swiss bank delivered a resilient performance and so did equity derivatives, mergers and acquisitions, and securitized products. In the press release, it also said that the investment bank and wealth management divisions faced lower activity levels compared to the same period a year ago. In addition, the bank hedged itself from further exposure and reduced its exposure to riskier assets. While this limits Credit Suisse’s high profit-earning potential, it will limit losses from CS investments. Management expects a risky macroeconomic environment to remain in place for months.
It is true that the risk of recession is quite high nowadays. Recessions are always problematic for the banking industry because the financial sector is cyclical, meaning it flourishes when the economy does well and falls substantially when the economy does.
While not all of these factors are very motivating, the losses to Credit Suisse are temporary. I understand that this does not sound plausible as the financial impact from the failure of ArcGos is lasting for over a year. But the Arcagos scandal, court proceedings, and related expenses are not here to stay — in other words, “this too shall pass,
So I think investors are a little too pessimistic. Of course, no one knows exactly when Credit Suisse will turn a substantial profit, but as soon as it does, it may be too late to buy the bank’s shares.
Evaluation
The figure below shows the diluted quarterly EPS history of the bank. On the graph, we can also see the stock price history.
Data by YCharts
The share price is trading at a 10-year graph low, which is very low. If we take the recent losses by Credit Suisse as serious, you will see from history that between 2016 and 2017 things looked very bad for the bank. And yet, the stock price was higher than it is now. If we look at 2016, the stock traded near the $20 mark, despite a really poor performance. I don’t suggest that Credit Suisse’s share price will reach that level anytime soon, but if the bank stops reporting losses and geopolitical conditions improve, so will its share price. can.
conclusion
I in no way recommend conservative investors to buy a substantial stake in Credit Suisse right now. There is a lot of uncertainty in the market at this time. The quarterly results were not good. But, in my view, this too shall pass. Eventually, Switzerland’s second largest bank must recover from all these scams and pitfalls. When this will happen is difficult to predict, but buying a dip can be a good strategy for patient investors.
