SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
Credit Suisse
Passes all the tests
CS screens well on our sector criteria and is one of the banks in our
universe that shows upside after taking account of regulatory hits to
earnings and a delay in the macro recovery. Our fair value of CHF60
(down from CHF70) would be closer to CHF50 taking into account
potential regulatory hits showing upside of over 20% at these levels.
CS is far less impacted by concerns on funding, the speed of a macro
recovery and capital than peers and its key challenge has been
earnings downgrades due to lower equity markets, which is more
than discounted at current levels. The current share price is factoring
in 1x TBV for the investment bank and 10x the non investment bank
on 2010 assumptions.
Earnings downgrades discounted
CS is one of the banks in the sector that has been most correlated to consensus
earnings changes year to date with the stock down 20% vs cumulative
downgrades of some 14% (including Q2 revisions) for 2012. In advance of the Q2
results we are downgrading our forecasts by 7% for 2012 and 9% for 2010/11 largely
on account of weaker equity markets. These downgrades have been driven by a
combination of a higher tax rate and weaker equity markets, which have affected
our AUM growth forecast, equity revenues in the investment bank and held back
the expected improvement in private banking gross margins. At this stage this is
more than in the price and the market is pricing in a continued subdued outturn in
markets. Importantly even after bringing down our investment banking forecasts
the Q2 assumed ROE in the IB is some 19% annualized post tax, albeit down from
31% in Q1 but still a respectable level. The pre-tax margin assumed in the private
bank is low for 2010 at 28% vs the 40% goal and we now only expect 32% by 2012.
CS screens well on regulatory changes
Regulation and the impact on both the p&l and the capital base remain a key
consideration for any bank. On our regulatory screen a combination of new
liquidity rules, OTC derivative changes and likely taxes take some 15% off net profit.
CS is one of the few banks in Europe that screens well to the upside post taking
into account regulatory earnings. In addition there remains uncertainty over the
new capital rules under B3 and CS screens well relative to peers due to a starting
core T1 of 10% and strong capital generation from the private bank as well as a
relatively limited impact from the proposals other than on DTAs, which should be
largely used by the time of implementation. On a stress test CS screens well.
Private bank remains a differentiator
The private bank remains a source of significant capital generation. In spite of the
issues with the European offshore business the net inflows have remained
relatively robust and net new money growth of over 5% remains achievable. The
Asian business is growing flows at over 20% and growth in Europe remains
positive in spite of the impact of German funds flowing offshore. The gross margin
has been an issue with clients being far slower to re risk than initially expected but
consensus has now come down and assumptions are that gross margins will be
towards 120bp below the bank’s range of 125-135bp. We still expect the business to
show decent operating leverage in an event of an equity market upturn.
Valuation attractive
A price to book model on current forecasts CS looks significantly undervalued.
Adding in regulatory impacts at 15% hit to earnings brings our FV down to CHF50.
We also look at CS on a SOP and the current price is valuing the IB at 1x TBV (GS
trades on 1.2x) and the non investment bank on 10x 2010 earnings, which is a low
level (Julius Baer trades on 12x 2010).
http://www.execution-noble.com
BUY
47% upside
Fair Value CHF 60.0
RIC, Bloomberg Code CSGN.VX, CSGN VX
Share Price CHF 41
Market Capitalisation CHF 47,235m
Free Float 87%
CHFm (unless stated) 2009 2010E 2011E 2012E
Pre-provision profit 10,125 9,672 10,695 12,146
Pre-tax profit 8,269 8,558 9,505 10,927
Adjusted net profit 6,593 5,974 6,684 7,648
EPS adj (CHF) 5.67 5.02 5.65 6.46
BVps (CHF) 30.1 33.2 36.9 41.5
BVps adj (CHF) 21.9 24.8 28.4 33.0
LLP as % Loans -0.21 -0.07 -0.10 -0.11
Cost income ratio (%) 67.8 68.5 67.1 66.0
X (unless stated) 2009E 2010E 2011E 2012E
Adjusted P/E 7.2 8.1 7.2 6.3
Pre-provision multiple 4.7 4.9 4.4 3.9
Price / book 1.36 1.23 1.11 0.98
Price / book adj 1.87 1.65 1.44 1.24
Yield (%) 4.9 4.9 4.9 4.9
ROE (%) 19.6 16.2 16.5 16.9
ROE (adj) (%) 28.6 22.2 21.9 21.7
Tier 1 ratio (%) 10.0 9.8 10.9 12.0
Analysts
Fiona Swaffield
+44 20 7456 1693
fiona.swaffield@execution-noble.com
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