Credit Suisse a solid bank

Even though heightened regulatory requirements could put more pressure on the bank's trading margins, the stock is worth more than its current price.

By Trefis Dec 12, 2011 6:03PM
Credit Suisse (CS) shares fell more than 4% Monday to $23.69 -– almost half the $47 per share commanded in February. The progressive deterioration of the debt situation in Europe and the ensuing economic slowdown have hammered the value of all major global banking institutions.

New tax agreements between Switzerland and other countries like the U.K. and Germany -- with more countries likely to be added to the list -- are also expected to hit the secrecy afforded by the Swiss banking system, directly affecting Credit Suisse and its larger Swiss competitor UBS (UBS). And don't forget the ongoing issues between Credit Suisse and the U.S. Department of Justice for allegedly aiding tax evasion, or the mortgage-backed securities related lawsuit by the U.S. Federal Housing Financing Agency.

Even so, all these factors combined do not justify the current market price, which we believe shows the extremely pessimistic market sentiment toward the banking sector.

We recently revisited our forecasts for the bank and revised our price estimate for the bank's stock from $48 to just under $33, and detail below the reasons for this reduction in our estimate.

See our complete analysis of Credit Suisse here

Wealth management business to see slower growth

The wealth management business is the cornerstone of Credit Suisse's model, with these operations contributing to nearly half our estimated value for the global bank.

Credit Suisse Assets Under Management

But Credit Suisse reported a loss in its wealth management operations for the third quarter, with a substantial outflow of assets bringing down its assets under management (AUM). And with economies around the globe feeling the effects of this slowdown, our previous forecast of near 5% annual growth in AUM does not appear achievable in the near term.

To add to that, the increasing number of tax treaties between Switzerland and various nations that view it as a tax haven will also hit the bank's operations, which will likely contribute to the slower growth rate in AUM.

Reduced focus on trading operations

In light of the recent directives from Swiss regulatory authorities to improve the long-term sustainability of its business, the bank has been trimming its sales and trading operations across the globe.

Credit Suisse Credit Assets for Bonds Currencies & Commodities

The bank is currently selling off assets to meet stringent capital requirements, leading to a decline in its total trading assets. However, we believe that those moves are largely one-time in nature and that trading assets will resume growth soon, albeit at a slower rate than we earlier predicted.

Credit Suisse Equities Trading Operating Margin

The heightened regulatory requirements are also expected to put more pressure on Credit Suisse's trading margins, which we have factored into our forecasts.

Tags: CSubs


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