Credit Suisse’s Focus On International Wealth Management Arm Boosts Profits
Credit Suisse reported a strong performance for the second quarter of 2018, with the bank’s recent efforts to refocus its business model on its global wealth management operations yielding results. Notably, the Swiss bank reported a strong inflow of cash across its operating divisions, in sharp contrast to the sizable outflows reported by its larger rival UBS for the same period. At the same time, Credit Suisse has done extremely well to cut operating costs – allowing it to report profit margins for its cornerstone wealth management business that are comparable to figures last seen over 2005-07. We have summarized Credit Suisse’s Q2 2018 earnings and also detailed our expectations for the rest of the year in our interactive dashboard for the company, the key parts of which are captured further below.
While Credit Suisse foresees headwinds for its investment banking operations (especially its securities trading desks) over the second half of 2018 from a potential trade war, we believe that this is only a short-term hurdle for the bank and does not take away from the long-term potential that exists from its swelling wealth management business – particularly in the rapidly growing Asia Pacific region. Accordingly, we maintain our price estimate of $20 for Credit Suisse’s shares, which is roughly 25% ahead of the current market price.
Strong Inflows, Upbeat Asset Valuation Boosts Assets Under Management
Credit Suisse’s total assets under management grew to a record CHF 1.4 trillion by the end of Q2 2018 from CHF 1.31 trillion a year ago – a 7% jump. The growth was driven by strong inflow of assets across the bank’s global operating divisions, with investors adding CHF 15.4 billion in fresh cash over the quarter. Although this is lower than the CHF 25.1 billion figure for the previous quarter, it is well above the average quarterly inflows of CHF 6.7 billion reported by Credit Suisse over 2016-17.
Notably, Credit Suisse’s private banking business saw net inflows of CHF 9.1 billion for the quarter, with the international operations (excluding Switzerland and Asia-Pacific) roping in CHF 5.2 billion in assets followed by CHF 3.4 billion in assets for the Asia-Pacific arm. We expect Credit Suisse to continue to benefit in the future from strong inflows as it consolidates its presence outside its home market of Switzerland.
Trading Desks Had Strong Q2, But Headwinds Expected Over The Second Half Of The Year
Credit Suisse made the most of increased volatility in Q2 to churn out more than CHF 1.6 billion in securities trading revenues for the second consecutive quarter. This is a commendable effort, given that the figure for the first quarter was seasonally elevated. It should be noted that Credit Suisse has been working on growing its equity trading operations since late last year in an attempt to regain lost ground in the industry, and these efforts have clearly had a positive impact on the top line. This should also help the bank deal better with a potential decline in activity over the second half of 2018 given global concerns about a trade war.
At the same time, the bank saw a notable increase in its advisory & underwriting fees for the quarter, as these fees remained above CHF 1 billion for the third consecutive quarter. These revenues gained in particular over Q2 from a jump in M&A advisory and debt origination fees.
Cost-Cutting Efforts Boost Profitability
Credit Suisse reported a pre-tax profit margin in excess of 35% for its cornerstone wealth management operations for the second consecutive period. This marks a substantial improvement from the average figure of 25% over the ten-year period from 2008 to 2017, and is closer to the average figure of 38% for the division’s margins prior to the downturn. At the same time, margins for the corporate & institutional clients division have been at the highest level since late 2013. These are important developments, as they will unlock significant value for the banking giant going forward.
However, Credit Suisse’s investment banking margins remain subpar, with the figure hovering around 15% over recent quarters. This compares to investment banking margins of at least 30% for most U.S. investment banking giants. While the larger market shares of the U.S. banks would contribute to a margin figure higher than the industry average, we believe that Credit Suisse should be able to achieve a figure closer to 25% in the long run.