Credit Suisse Stock: Valuation Less Important Than Earnings (CS)

After the US giants, European banks will start their quarterly earnings season. Credit Suisse (CS) will report the Q4 Results on February 10, but it has already updated its investors with a profit warning. Going into the detail, the Swiss bank warned that it may have suffered a loss due to enormous legal fees linked to the numerous scandals that broke out last year.

In addition, the group led by CEO Thomas Gottstein and the new president Axel Lehmann stressed that its investment bank division was impacted by a slowdown in transaction revenue which went beyond the purely seasonal developments and normalization of market conditions.

Going a step back and following what has happened on the Company we should update our readers to the following:

1. Just eight months after taking office, Credit Suisse sacked president Antonio Horta-Osorio for violating the Covid-19 quarantine restriction. This event happened last summer in July and we are pretty sceptical about the management operation within the Company. Rumours of possible European M&A came to our attention, without speculating too much, we find it very convenient that the newly appointed President was dumped just months after taking the reins.
2. A few months ago, Credit Suisse was involved in the Archegos scandal providing funds to the highly leveraged US hedge fund. As a result, Credit Suisse forced the fund to close its investments in order to limit the losses related to the exposure. However, the Swiss giant reported a considerable loss.
3. Again last July, it was involved in another scandal with the Anglo-Australian Greensill Capital corporation. Greensill remains a live problem and has a potential capital impact to come.

As shown recently by US banks, including JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), Credit Suisse also highlighted a slowdown in trading activity and this might affect the investment banking division.

Credit Suisse’s profit warning certainly comes as no surprise. As early as November, when they published their Q3 Results, the bank warned the investor community about a goodwill write-down of CHF 1.6 billion ($1.74 billion). Donaldson, Lufkin & Jenrette’s acquisition in 2000 and a decline in market volumes in the wake of moves by central banks will further complicate and deteriorate the Swiss institute that is currently pursuing reform of its risk management culture after the annus horribilis.

Conclusion

This week’s profit warning gave a glimpse of what will happen on February 10th. The Bank has made extensive personnel changes but we note that earnings risks are definitely more important than the implied stock price. Credit Suisse has underperformed the market, our internal team updated our financial forecast, downgrading the Company with a neutral rating at 9 CHF per share, valuing the Swiss entity with a ROTE adjusted on 6% based on FY results in 2022.