Credit Suisse Stock To Miss The Earnings Consensus In Q2, Revenues To Beat Expectations

Credit Suisse (NYSE: CS) is scheduled to report its fiscal Q2 2021 results on Thursday, July 29. We expect Credit Suisse to beat the consensus estimates for revenues, while its earnings will likely miss the mark. The bank posted 48% y-o-y growth in its top-line in the first quarter of 2021, primarily driven by higher investment bank revenues (sales & trading and investment banking). However, it was unable to capitalize on it and reported negative net income due to the impact of the Archegos Capital crisis – the hedge fund collapsed after having borrowed extensively from several banks to finance risky bets on a handful of stocks. While the investment bank is likely to drive second-quarter results, losses related to the Archegos crisis will continue to weigh on the profitability figures (Note – Credit Suisse originally reports in CHF (Swiss Francs), the same has been converted to USD for ease of comparison).

Our forecast indicates that Credit Suisse valuation is around $12 per share, which is 14% more than the current market price of around $10. Look at our interactive dashboard analysis on Credit Suisse’s pre-earnings: What To Expect in Q2? for more details. 

(1) Revenues expected to be marginally ahead of the consensus estimates

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.

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. Trefis estimates Credit Suisse’s fiscal Q2 2020 revenues to be around $5.75 billion, around 3% above the $5.60 billion consensus estimate. The bank reported total net revenues of $23.9 billion in 2020 – up 4% y-o-y. This was due to strong growth in the investment bank segment (sales & trading, and investment banking businesses), which benefited from higher trading volumes and a jump in underwriting deal volumes. However, the growth was partially offset by lower net interest income (NII) due to interest rate headwinds. The investment bank continued its growth trajectory in the first quarter of 2021 and we expect it to drive the second-quarter results, too.

Moving forward, we expect the sales & trading and investment banking revenues to normalize, with recovery in the economy. Further, a low-interest environment is unlikely to see an immediate revival to the pre-Covid-19 levels. That said, the bank has reported positive asset growth in the international wealth management and Swiss bank segments over the recent quarters and we expect it to continue its growth trajectory. Overall, Credit Suisse’s revenues are likely to touch $25.9 billion in FY2021. Our dashboard on Credit Suisse revenues offers more details on the company’s segments.

2) EPS is likely to miss the consensus estimates

Credit Suisse Q2 2020 adjusted earnings per share (EPS) is expected to be $0.21 per Trefis analysis, almost 13% below the consensus estimate of $0.24. The company reported an 18% y-o-y drop in its net income in 2020, mainly due to higher provisions for credit losses and an increase in operating expenses as a % of revenues. Further, the bank’s net income declined from $1.2 billion to -$279 million in the first quarter of 2021, 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.

We expect the net income margin to suffer in FY2021, leading to an adjusted net income of $2.6 billion – down 7% y-o-y. Overall, CS is likely to report an EPS of around $1.04 in FY2021.

(3) Stock price estimate 14% more than current market price

Going by our Credit Suisse Valuation, with an EPS estimate of around $1.04 and a P/E multiple of just above 11x in fiscal 2021, this translates into a price of $12, which is 14% above the current market price of around $10.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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