April 25, 2018 / 10:27 AM / in 3 months

Breakingviews - Credit Suisse valuation gives no margin for error

LONDON (Reuters Breakingviews) - Call it the curse of high expectations. In mid-February Tidjane Thiam confidently trumpeted the Swiss bank’s “strong start” to “market-dependant activities” – in other words, trading. Back then, the Credit Suisse boss pointed to an estimated year-on-year increase in net revenue for the first six weeks of the year of more than one-tenth, thanks to increased market volatility. Performance must have trailed off – while the picture looks better in U.S. dollar terms, net revenue in the global markets division eventually fell 4 percent year-on-year in the quarter.

The logo of of Swiss bank Credit Suisse is seen at an office building in Zurich's Oerlikon suburb, Switzerland July 27, 2017. Picture taken July 27, 2017

By now, Credit Suisse is used to shrugging off torpid investment banking results. A 27 percent year-on-year increase in underlying wealth management pre-tax profits was buoyed by a rise in the adjusted net margin to 43 basis points, more than double that of rival Swiss wealth manager UBS. Overall that has spared Thiam too much embarrassment – group pre-tax profit jumped 57 percent year-on-year, the highest in 11 quarters.

In a sense, traders’ dour performance serves to underline the lender’s transformation from investment banking powerhouse into far-flung private banker.  Three years ago, trading and other “markets activities” accounted for over half of risk-weighted assets, compared to 35 percent currently. Now they provide only a fifth of underlying pre-tax profits while wealth management accounts for the rest. The latter division only contributed 41 percent in 2015.

That’s encouraging, but the bank still only managed a 7.6 percent return on tangible equity, significantly below its 10 percent likely cost of capital. Lower costs will provide the main leg-up to clearing that threshold: Thiam targets another 800 million Swiss francs of cost savings this year, and pre-tax losses from Credit Suisse’s run-off division are expected to decline from 1.4 billion Swiss francs this year to around 500 million Swiss francs in 2019. If he succeeds, Credit Suisse returns will look less threadbare compared to the 13.6 percent sported by perennial rival UBS.

Shares initially rose by 5 percent on Wednesday morning, despite Thiam striking a cautious note with regard to future expected “periods of heightened volatility”. But trading at almost a 15 percent premium to tangible book, investors are showing a touching faith in his ability to deliver.

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