Credit Suisse - Strategic drift about to experience a “vertical” interruption; CL Buy
* Source of opportunity
A period of strategic drift is set to finish before year end, and possibly as
early as October (Bloomberg, September 12), when CS announces the
outcome of its strategic review. We expect (1) a refocus on its best business
(private banking), (2) deemphasized IB, (3) clear cost targets, which could
include vertical cuts. Finally, (4) we continue to see the possibility of CS
resorting to a capital hike to accelerate the restructuring. We reiterated our
Buy rating at the time of the management change; now, as deep, vertical
restructuring becomes probable, we add CS to our Conviction List and the
Directors of Research Focus List.
* Catalyst
The basic difficulty for CS is a current strategy that solves for a sub-optimal
ROE. It seems the new management is set to acknowledge and change this.
So, what is an achievable ROTE for CS? We take the following steps to
determine this: (1) we start with the 2014 ROTE (5.4%), and (2) re-calibrate it
to steady-state capitalisation (2018E); we (3) normalise litigation and
restructuring, which suggests a ROTE of 8-10% is achievable, with minimal
execution risk. Assuming (4) successful cost cuts, a ROTE of 11%-13%
materialises; and finally (5) were PB revenues to grow, we think a further
ROTE uplift of c.2% is possible.
* Valuation
Pre 2Q12, UBS and CS were the closest of peers. Since then, CS’ strategy
has focused on keeping IB scale, whilst UBS did the opposite. On a P/TB
basis, the valuation differential expanded from nil to 30%. This gap could
close, and we reflect this in our 12-month ROTE/COE price target by rolling
the valuation forward by a year (to 2018E); our new PT stands at SFr32.5
(from 30.80). We update our estimates for recent market trends.
* Key risks
Adverse regulatory impacts (implementation of the Brunetti Report);
worsening of market conditions; SFr moves; PB margin compression.