Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message|
( followers)

Credit Suisse (NYSE:CS) released its performance figures for the last three months of 2012 early this Thursday, and there are some notable pluses and minuses on the bank's report card. The good news is that the bank's focus on getting itself ready for tough capital requirements imposed by Swiss regulators -- arguably the most stringent around the world -- has yielded great results, with the bank expected to meet the requirements mandated by the Basel Committee at the end of 2018 as early as within the next few months.

Also, the series of cost-cutting measures implemented by the bank are beginning to show a positive impact on the bottom line. On the flip side, Credit Suisse is still struggling to maintain its revenues with the top line shrinking for the second consecutive quarter. The trading business put up a particularly poor show as revenues dipped by 25% in Q4 2012 compared to Q3 2012.

We are updating our price estimate for Credit Suisse's stock based on:

  • Stronger-than-expected growth in assets managed by the wealth management division -- especially from American clients
  • An upward revision of projected operating margins for all businesses based on better-than-expected cost savings across divisions coupled with the new CHF 4.4 billion ($4.8 billion) cost reduction target by 2015 -- up from the target of CHF 4 billion ($4.4 billion) set earlier
  • Increased trading yield estimates as a direct result of relaxation in Basel 3 requirements related to certain asset classes

Wealth Management Business Upbeat, but Lots of Room for Improvement

Credit Suisse's cornerstone wealth management business had good news to offer for 2012 in terms of a notable increase in assets it manages. Although assets from Swiss clients largely remained stagnant around CHF 253 billion ($280 billion) throughout the year, there was a spurt in assets from clients in the Americas and Asia-Pacific. Assets from clients in North and South America increased 15% over the year -- from CHF 143.5 billion at the end of 2011 to CHF 165 billion at the end of 2012 -- whereas those from clients in the Asia-Pacific region shot up 22% from CHF 87.9 billion to CHF 106.8 billion. Overall, the total size of assets managed by the wealth management division rose 6.5% in 2012.

But the increase in assets did not really translate into earnings for Credit Suisse as total revenues for the business actually declined marginally. Hopefully, this is what Credit Suisse puts its back into over the coming quarters.

Advisory and Underwriting Business Yields Results, Trading Doesn't

The last quarter of 2012 was exceptionally good for Credit Suisse in terms of advisory and underwriting, with these businesses generating the highest amount of revenues for the bank in two years since the blockbuster last quarter of 2010. We had mentioned Credit Suisse's strong performance in these investment banking functions in our article "Credit Suisse Tops List Of U.S. IPO Underwriters For 2012."

But the success of the bank's M&A advisory and underwriting units did not rub off on the trading desks, which continued to struggle to make money. In fact, the equity and debt trading units reported their lowest quarterly figures for 2012 in the last quarter.

That said, it must be mentioned here that in Q4 2012 Credit Suisse's investment banking division as a whole reported the lowest ever quarterly expense figure since the global economic downturn of 2008 -- something that goes a long way in saying how effective the bank's cost-cutting policy has been in reigning in costs.

Disclosure: No positions.

Source: Revising Credit Suisse Estimate To $32 On Outlook, Despite Mixed Results