Turnaround at Credit Suisse?

06/23/2017 2:50 am EST


George Putnam

Editor, The Turnaround Letter

Credit Suisse ADR (CS), based in Zurich, Switzerland, was founded in 1856 and for over a century was a rock-solid if dull Swiss bank. Today, the company is a global wealth management and investment banking firm, notes George Putnam, editor of The Turnaround Letter.

Over the last few years Credit Suisse has struggled with weak management, lagging investment banking results, inefficient operations and low levels of capital. 

Compounding its problems, the bank has paid out billions in penalties related to tax-evasion charges, mortgage-backed securities losses and other issues. As a result, its shares remain 50% below their already-depressed level of two years ago. 

In mid-2015, Credit Suisse hired Tidjane Thiam as its new CEO. Thiam previously was head of British insurer Prudential, where he successfully implemented a growth and capital re-allocation strategy.

For Credit Suisse, his challenge is to similarly improve the bank’s profits while reducing its risk level and reliance on scarce capital.

While the two companies are very different, the goal is essentially the same. Thiam wants the new bank to “be a leading private bank and wealth manager with strong investment banking capabilities.”

Thiam is refocusing Credit Suisse’s business model to drive more client focused, fee-based income and use less capital.  Moreover, the company is getting out of some of its higher risk trading and investment banking activities.

Despite Credit Suisse’s problems, its brand and core franchise remain strong. The restructuring efforts are beginning to show promising results although the pace remains slow.

Costs are coming down, the company is seeing better net inflows into its $1.3 trillion assets management business, overall management is tighter and capital raises have bolstered the balance sheet.

While the shares carry significant risks due to the leveraged nature of Credit Suisse’s operations and its sensitivity to the capital markets, we see considerable upside potential if the turnaround is successful. 

Although the annual dividend yield may vary, it is currently generous and will compensate investors while they wait for results to improve further. 

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