Credit Suisse Stock Is Trading Inadequately Low (NYSE:CS)

Банк Credit Suisse отделении банка

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To start with, Credit Suisse (CS) stock has been facing some pressure for several years already. There was a series of problems, including the spying scandal between 2019 and 2020. But the bank’s stock became particularly unpopular after the collapse of Archegos last year. It was straight after the collapse when Antonio Horta-Osório was appointed as the Chairman. Now Horta-Osório had to resign. The stockholders are obviously worried at the moment since it is always preferable when there is some sort of stability. In other words, during a crisis, it is important to have the same Chairman to lead the organization out of it. But the extent of the problem is rather exaggerated here. In this article, I will explain why.

Credit Suisse’s new Chairman

After the Archegos scandal, the bank started recording profits. True, it might not be entirely because of Horta-Osório but it seems that the management did an adequate job. I wrote several articles about the bank’s quarterly profits. They were by no means brilliant compared to the 2018-2020 results but there was a sign the bank’s earnings were improving.

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Data by YCharts

As can be seen from the diagram above, in 1Q21 Credit Suisse reported a loss. It was exactly the time when the Archegos scandal occurred. The 2Q21 results were also affected but the EPS were positive. The 3Q21 results were also positive and better than the 2Q21 earnings.

3Q21 media release

Credit Suisse, 3Q21 media release, page 1

Indeed, the fact the Chairman was replaced by some sort of new risks and instability for the bank.

However, the very fact the bank’s Chairman was replaced with the new one does not mean the former management appointed after the Archegos scandal badly missed expectations of the bank’s stakeholders. Normally, investors are concerned when one of their bank’s top managers resigns as a result of financial misconduct or any other matter sufficiently undermining their shareholders’ returns. But here we can see that rather the opposite is true.

According to the investigation conducted by the board of directors, Horta-Osório breached lockdown rules when he attended Wimbledon tennis finals last summer and in Switzerland in December. The board was also reportedly concerned with the Chairman’s use of the bank’s jet and the lack of time the former Chairman spent in Zurich. In other words, although the Chairman resigned, this alone does not mean the bank faces any significant financial threat. In other words, it was rather his personal life that was the cause of his resignation and not his lack of expertise or fraud directly affecting the bank’s stakeholders.

At the same time, it could be argued that he neglected his duty of care when he did not attend his workplace in Zurich where the bank’s headquarters are based. The impact still remains to be seen, of course. The bank will report its 4Q21 and full-year results on 02/10/2022. But so far the earnings have shown some signs of improvement in spite of Mr. Horta-Osório not attending his physical office. After all, the bank’s performance does not only depend on the Chairman. Other top managers’ roles are also important. In the case of Credit Suisse, this is especially true of the risk management department. In fact, excessive risk-taking was the main reason for the Archegos losses. Fortunately, straight after the scandal, the risk-management employees were replaced and nothing similar to the Archegos failure happened so far.

The time will tell if the new Chairman, a former UBS executive Axel P. Lehmann, would do a better job. However, many analysts say it is a reasonable choice. After all, UBS, Credit Suisse’s main competitor, and a far larger bank, has done a great job this past year. UBS’s earnings have been rising for several years in spite of the pandemic shock in the first half of 2020.

Credit Suisse’s stock and the risks

In my opinion, the investors have overreacted to the news on 01/18/2022 when the resignation was announced. So, as a result, the share price dropped significantly.

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Data by YCharts

The valuation ratios, meanwhile, are quite low.

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Data by YCharts

This is especially true of the bank’s price-to-book (P/B) ratio, which is below 0.5. This makes the bank’s stock attractive for investors looking for bargains.

However, the stock price decrease was not just the result of the news. The problem is that the 10-year treasury yields increased, whereas the stock markets in Europe and the US went down.

There was another worrying news for the markets, namely the earnings report by Goldman Sachs (GS). Even though the results were better overall than they had been for the same period a year ago, the bank’s earnings were below the analysts’ estimates. This was mainly due to the higher wages many employees demanded. As we can see here, inflationary pressures have started to build up, which is quite risky for the economy. At the same time, the fact the yields are going up and so are the interest rates is usually beneficial for the financial industry since banks profit from higher interest rates.

There is a risk, of course, that Credit Suisse’s results may not be as good as many analysts expect them to be for the same reason the earnings recently reported by Goldman Sachs were not as great.

What is more, the economic post-Covid recovery is slowing down, whereas inflation is heating up. The central banks all over the world, including the Fed, are tightening the monetary policies. This might lead to recession sooner rather than later.

However, I do hope Credit Suisse will recover from the scandals it faced under the new management and might even benefit from rising interest rates. This means its profits will rise just like its stock price.

Conclusion

Obviously, Credit Suisse is a bank shattered by scandals with Archegos being the most notorious one. But soon after the Archegos-related loss, the bank started reporting profits. My base-case scenario, should nothing bad happen to the global economy, is that under the new management Credit Suisse will eventually start recording higher profits. That is why, in my opinion, the bank’s shareholders could be generously rewarded for their patience.

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