July 31, 2018 / 10:32 AM / 9 months ago

Breakingviews - Credit Suisse returns can vault flatfooted traders

Chief Executive Tidjane Thiam of Swiss bank Credit Suisse speaks during the Forum 100 conference in Lausanne, Switzerland May 19, 2016. REUTERS/Denis Balibouse - LR1EC5J0MZ4JW

LONDON (Reuters Breakingviews) - Tidjane Thiam’s multiyear restructuring ordeal is drawing close to an end. The chief executive of Credit Suisse saw quarterly earnings roughly double due to its wealth management unit. The bank’s profitability is still less than rival UBS thanks to an underperforming investment bank. But Thiam should still be able to hit his 10 percent return on equity benchmark next year.

The combination of buoyant wealth businesses with a misfiring investment bank has become a common trope of Thiam’s reign. In the second quarter core private banking pre-tax profit rose by 14 percent compared with a year earlier, while that of investment banking declined by nearly the same amount. Traders did especially badly. Quarterly pre-tax profit at Credit Suisse’s global markets division dropped by more than two-fifths year-on-year.

Still, Thiam’s recipe of aggressive cost-cuts and the expansion into less volatile earnings from managing rich people’s money is paying off. The bank’s annualised return on tangible equity (ROTE) doubled in the second quarter to 6.9 percent compared to the same period last year. That’s still far below Credit Suisse’s likely 10 percent cost of capital, never mind rival UBS’s 11.6 percent ROTE. But investors may not have to wait long, thanks to a slew of further cost cuts, and the wind-down of Credit Suisse’s non-core unit, which should add around 2 percentage points to the ROTE next year.

Assume, conservatively, that Thiam manages to generate the same revenue next year as he did in the first half annualised, or 22.4 billion Swiss francs. If he can also hit his cost targets of 17 billion euros, and keep loan loss provisions to the 250 million Swiss francs expected by analysts, according to Eikon, then the group’s return on equity will hit 10 percent, according to a Breakingviews calculation, the first time since 2010 that Credit Suisse will match its cost of capital. Revenue of 23 billion Swiss francs, in line with Eikon forecasts, could tip return over 11 percent.

Credit Suisse shares are trading in line with its tangible book value. They could rise further if Thiam exceeds his target, but still look a distant second next to UBS, which trades at more than 1.3 times this year’s tangible book value. Nevertheless, after years of value destruction shareholders finally have something to look forward to.


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