EUR 850.00 For Business Accounts Only

Morningstar | Credit Suisse: Ballooning Tax Rate Mars Otherwise Solid Results

Narrow-moat, Best Idea Credit Suisse reported 2018 profit before tax of CHF 3.4 billion, nearly double the CHF 1.8 billion it reported for the previous year. Profit before tax was ahead of consensus expectations of CHF 3.2 billion and only slightly below our CHF 3.5 billion estimate, however, due to a sharply higher effective tax rate, net profit of CHF 2 billion was substantially below our estimate of CHF 2.4 billion. Mainly in order to reflect what seems to be a structurally higher tax rate, we pare back our fair value estimate to CHF 20 per share from CHF 22 per share previously. Credit Suisse managed to still generate net inflows into its assets under management during a very volatile final quarter of 2018, this while all its peers recorded net outflows. We believe that this is further evidence of the switching cost economic moat we award Credit Suisse. We maintain our narrow moat rating.

We expect that Credit Suisse will grow its earnings before tax by 28% to CHF 4.4 billion in 2019. It is important investors remember that Credit Suisse recorded pretax losses in its strategic resolution unit, or SRU, of CHF 1.4 billion in 2018. These losses will largely disappear in 2019, which provides us with very good earnings visibility. The SRU was set up to ringfence and run-down the legacy exposures and activities of business units that Credit Suisse have deemed not core of its future strategy. The target for the SRU is to keep its losses below USD 450 million in 2019.

We estimate that Credit Suisse will achieve net profits of CHF 3 billion in 2019, this represents an increase of 49% compared with 2018. The faster growth in net profits compared with pretax profits is the result of a normalisation of Credit Suisse's tax rate to 30% in 2019 compared with 40% in 2018.

Historically, Credit Suisse has guided a tax rate of around 24%. However, the U.S. Internal Revenue Service is cracking down on base erosion and what it believes to be excessive deductions for interest expenses, and this has forced Credit Suisse to increase its guided tax rate twice during 2018. It is our understanding that Credit Suisse's operational tax rate is around 22%. The issues around interest deductibility and base erosion in the U.S. has pushed it up to 30%. Credit Suisse was loath to provide guidance further out than 2019, so erring on the side of caution, we now use 30% as the midcycle tax rate in our fair value estimate. If Credit Suisse can manage to resolve the issues with the IRS it represents upside risk to our current estimates.