Credit Suisse Messed Up Badly, But There's Still Value
Summary
- Credit Suisse messed up badly, waiting after the major U.S. banks to unload Archegos Capital stock.
- The company's $4.7 billion in losses wipe out more than 18 months in earnings, and the company has the potential to see additional losses.
- Credit Suisse, post paying off this loss, has the potential to have a single-digit P/E ratio if things balance out.
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At the start of March, most in the investment world had never heard of Archegos, a family office from a tiger cub, Bill Hwang. Then, the $10s of billions of assets the firm had caused a margin call and collapse rocketing through the financial world. Major banks such as Credit Suisse (NYSE:CS), UBS (UBS), Goldman Sachs (GS), and Morgan Stanley (MS) were forced to unload billions of dollars of shares.
Archegos Capital Meltdown
Major U.S.-based trading operations of Morgan Stanley and Goldman Sachs took the lead, minimizing losses. Morgan Stanley managed to use its connections to sell $5 billion of stock the night before the stock sales started. Credit Suisse, and its slow unloading of shares, is staring down the barrel of a $4.7 billion loss.
The specifics of timing here is yet to be fully understood. Credit Suisse hasn't announced why they decided to wait over the weekend rather than unloading on Friday - especially when it became public the other companies were unloading. However, the net result here is Credit Suisse failed to respond the same way as major banks.
It's also worth noting this isn't Credit Suisse's first failure - the company recently saw Greensill Capital impact its financials heavily.
Credit Suisse Response
As a result, Credit Suisse has been forced to respond. The company's Chief Risk Officer and Investment Banking Chief have both been announced to be stepping down this month. The company's Archegos implosion alone, as we discussed above, will cost the company $4.7 billion that's led to the company cutting its dividend.
The company has also cut its dividend to CHF 0.10 per registered share, half from retained earnings and half from capital contribution reserves. This means the losses are being translated directly to shareholders.
Credit Suisse Opportunity
The question here becomes, in this mess and Credit Suisse's failures, are there opportunities? Since March 1, the company's market cap has dropped more than 25%, wiping out ~$9 billion in market capitalization. That's double the loss, but includes potential Greensill capital losses (expected to be much lower than the Archegos Capital losses).
Credit Suisse Earnings - Credit Suisse Investor Presentation
Credit Suisse's massive business has continued to perform outside of these shortcomings. The company had FY 2020 net income of CHF $2.7 billion giving it a single digit P/E. The company gave significant shareholder rewards and at its current net income has a single digit P/E ratio. The company, prior to the costs, had the ability to increase its dividends.
The company's $4.7 billion loss will, in effect, wipe out ~20 months of profits. That's significant. Part of this will be made up by the company's strategic initiatives, but the company will still need to repair the capital ratio. However, getting a company as an investment, that 18 months from now, will have a single digit P/E is an exciting investment.
Credit Suisse Long Term
Long term Credit Suisse has the ability to drive significant shareholder returns.
Credit Suisse Long-Term Assets - Credit Suisse Investor Presentation
Credit Suisse has grown its assets under management group, in USD, at 7% annualized from $1.227 billion in 2015 to more than $1.7 billion. Even in CHF, the company's assets have grown at 4% annualized. Wealth management has been a big part of this, while institutional growth has been slower.
Credit Suisse has a strong reputation and a captive banking market in Switzerland where the company has a substantial number of wealth management customers. Whether the company manages to continue growing while paying closer attention to risk management remains to be seen. However, at its current valuation, after the recent selling pressure, Credit Suisse is cheap.
Thesis Risk
The risk to this thesis is that Credit Suisse has a proven lack of ability in risk management. The company has effectively been wiping out years of earnings from its poor risk management and that has the ability to continue punishing shareholders. We don't understand the details, that aren't fully public, of the company's businesses.
However, given the company's history, there's some risk here.
Conclusion
Credit Suisse started selling late. The major U.S. banks and Deutsche started selling early, Credit Suisse and the Japanese banks chose to wait. The decision cost them billions, $4.7 billion to be exact. The company has already been forced to fire high level employees and cut its dividend, wiping out more than 18 months of earnings.
Going past this, however, we see Credit Suisse having the potential to generate strong shareholder rewards. The company was increasing earnings and dividends prior to the latest incidence. Assuming the company can clean up its business it has the ability to generate strong shareholder returns for those who invest today.
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This article was written by
The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.
He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.Analyst’s Disclosure: I am/we are long CS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (28)
They should keep this but improve their risk behavior. There's too much good which is in danger to be damaged. So a good investment if they don't damage their franchise.
