Credit Suisse To Pay Additional $750 Million In Greensill Crisis

[Updated 07/14/2021] Credit Suisse update

Credit Suisse stock (NYSE: CS) has lost 21% YTD, and at its current price of $10 per share, it is trading 15% below its fair value of $12 – Trefis’ estimate for Credit Suisse’ valuation. The bank has faced several challenges this year including the collapse of Greensill Capital in March – a supply-chain finance business, with which the bank has several ties including $10 billion worth of funds. In a recent development, the firm has agreed to pay out an additional $750 million to investors in its Greensill-linked supply chain finance funds, taking the total amount it has so far paid out to investors in the liquidation proceeds to $5.6 billion. 

Credit Suisse reported total net revenues of $23.9 billion for the full year 2020 – up 4% y-o-y. While the bank did post strong growth in sales & trading investment banking businesses, the positive effect was offset to a great extent by an 11% drop in net interest income due to a lower interest rate environment. Further, the firm posted total revenues of $8.4 billion in the first quarter of 2021 – an increase of 48% y-o-y, primarily driven by an 80% y-o-y jump in the investment bank revenues. That said, the investment bank revenues are likely to normalize over the coming months with recovery in the economy. Further, the low interest rates are unlikely to see an immediate return to the pre-Covid-19 levels for some more time. However, the bank has witnessed positive asset growth in the international wealth management and Swiss bank segments over the recent quarters and we expect the same to drive its revenues in the year. Overall, Credit Suisse’s revenues are likely to touch $25.9 billion in FY2021.

Despite the growth in the first quarter revenues, the bank reported negative net income in the quarter. It was mainly due to a build-up in provisions for credit losses from $557 million to $4.9 billion due to the impact of the Archegos Capital crisis. Further, we expect the bank to book more losses related to the crisis in the second quarter. Altogether, CS’ net interest margin is likely to suffer in FY2021, resulting in an EPS of $1.04 for the year, which coupled with the P/E multiple of just above 11x will lead to a valuation of around $12.

[Updated 05/07/2021] Is Credit Suisse Stock Fairly Priced?

Credit Suisse stock (NYSE: CS), the second-largest Swiss bank after UBS, lost roughly 20% – decreasing from about $13 at the beginning of 2020 to around $10 currently, underperforming the S&P500, which grew 12% over the same period. 

There were two clear reasons for this: First, the collapse of Greensill Capital – a supply-chain finance business, with which the bank has several ties including $10 billion worth of funds. Second, the meltdown of U.S. based hedge fund Archegos Capital after taking on too much risk – the bank suffered a loss of $4.7 billion in Q1 FY2021 due to the crisis (Note – Credit Suisse originally reports in CHF (Swiss Francs), the same has been converted to USD for ease of comparison).

But we believe there is more upside over the coming months 

Trefis estimates Credit Suisse’s valuation to be around $12 per share – about 13% above the current market price – based on one key opportunity and one risk factor.

The opportunity we see is Credit Suisse Revenue growth over the subsequent quarters. Credit Suisse reported full-year 2020 revenues of $23.85 billion – up 4% y-o-y, mainly due to growth in trading revenues, partially offset by an 11% drop in net interest income due to interest rate headwinds. The company witnessed an 18% y-o-y growth in its investment bank division, driven by higher sales & trading and investment banking revenues due to the impact of the higher trading volumes and jump in underwriting deals. Further, the investment bank revenues surged 80% y-o-y to $3.9 billion in the first quarter of 2021. However, the segment reported an operating loss of $2.56 billion due to the Archegos crisis. That said, growth in the investment bank is tied to higher trading volumes and underwriting deal volumes, which are  expected to normalize in the subsequent quarters. But, till that time, the segment is likely to dominate quarterly results. Further, Credit Suisse Assets under Management (AuM) crossed $1.76 trillion (CHF 1.59 trillion) by the end of the first quarter – 10% more than the $1.61 trillion figure at the end of 2020, mainly driven by asset growth in international wealth management and Swiss bank segments. The bank derives a major chunk of its revenues from commissions and fees – around 53% in 2020, and an increase or decrease in total AuM has a direct impact on it. Hence, growth in AuM is a positive sign for the bank’s top-line. Overall, we expect CS’ revenues to remain around $25.9 billion for FY2021.

Although CS’ revenues are expected to grow in FY2021, due to an increase in investment bank and wealth management segments, the net income margin is likely to suffer due to the impact of the Archegos Capital crisis. The bank increased its provision for credit losses in the first quarter of FY2021 – from $153 million to $4.86 billion. It is likely to result in an EPS of $1.04 for the year, which coupled with the P/E multiple of just above 11x will lead to a valuation of around $12.

Finally, how much should the market pay per dollar of Credit Suisse’s earnings? Well, to earn close to $1.04 per year from a bank, you’d have to deposit about $104 in a savings account today, so about 100x the desired earnings. At Credit Suisse’s current share price of roughly $10, we are talking about a P/E multiple of just above 10x. And we think a figure closer to 11x will be appropriate.

That said, banking is a risky business right now. Growth looks less promising in core banking, and near-term prospects are less than rosy. What’s behind that?

Credit Suisse reported net loans of more than $310 billion in FY2020. The loan repayment capability of its customers is directly linked to the economy. If the economic conditions deteriorate, the bank is likely to face significant loan defaults. Further, the bank increased its provision for loan losses to $4.86 billion in the first quarter, due to the Archegos Capital crisis. The effect of the crisis is likely to be felt in the second quarter as well, with banks expecting more losses. Additionally, the low-interest-rate environment will likely hurt the net interest margin (NIM) of the bank, negatively impacting the net interest income. To sum things up, we believe that Credit Suisse stock is currently undervalued and offers upside, given its strong investment bank and wealth management operations. 

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