EUR 850.00 For Business Accounts Only

Morningstar | Solid Earnings Beat for Best Idea Credit Suisse

Narrow-moat Best Idea Credit Suisse beat consensus expectations for the second quarter running by reporting second-quarter pretax profits of CHF 1.1 billion, an 81% year-on-year increase; consensus expected CHF 0.9 billion. Previously we did not model restructuring expenses, which Credit Suisse views as nonrecurring. However, we now pencil in CHF 500 million in restructuring expenses for fiscal 2018; this is the main driver of a 15% cut to our 2018 pretax profit estimate, to CHF 4 billion. We maintain our CHF 22 fair value estimate and narrow moat rating.

The results largely supported our investment thesis. First, earnings were supported by the absence of the high charges Credit Suisse had to take in the past against a portfolio of assets from business areas it choose to exit, mainly in investment banking. Second, profitability increased as resources and capital increasingly are being allocated to higher-margin wealth management activities and less to volatile investment banking revenue streams; this also improves Credit Suisse's risk profile. Lastly, we have consistently made a case for Credit Suisse as the "poor man's UBS." We believe it offers many of the same qualities as UBS at a discounted value. For the second quarter running, Credit Suisse delivered a stronger set of results than UBS.

Once again, it was pleasing to see solid net new money generation in the wealth management businesses. In the second quarter, Credit Suisse had private banking clients investing a net amount of CHF 9 billion, with CHF 3 billion in its strategic focus area in Asia. Arch rival UBS saw net outflows over the same period. The asset management business unit also saw net inflows of CHF 8 billion for the quarter. Credit Suisse now manages CHF 780 billion of assets in its private banking operations and a further CHF 400 billion in its asset management unit.

We believe that "cleaner" results disclosure will lead to enhanced earnings visibility and a better understanding by the market of Credit Suisse's underlying profitability. Credit Suisse's results are becoming much cleaner as the noncore books rundown is nearing its completion. It is our understanding that the rundown will be all but complete by the end of the year, after which the remaining assets and operations will be integrated back into the operating businesses. At the moment, Credit Suisse discloses three different profit and loss statements: the standard IFRS P&L, an "adjusted" P&L that excludes items that Credit Suisse deems nonrecurring, and a "core" P&L that excludes the assets being run down. The differences among these P&L are becoming less pronounced and the rationale for disclosing the core P&L becomes less clear.