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It is not the first time that we’re updating our readers on Credit Suisse (NYSE:NYSE:CS), and no other title would have been more appropriate: Valuation Is Less Important Than Earnings.
As a brief recap, we were sceptical about the Swiss bank due to “enormous legal fees linked to the numerous scandals that broke out last year”. In particular, we highlighted the Archegos and the Greensill Capital corporation scandals. Today, Credit Suisse updated the investor community with the following statements.
The bank announced today that it expects to post a loss in the first quarter of this year due to 1) rising legal fees, 2) slowing business activity and 3) negative revenues and provisions for credit losses implication related to Russia’s invasion of Ukraine. Translated into numbers: provisions related to the number of legal issues increased by 600 million Swiss francs to a total of around 700 million francs. The Q1 results will also include previously reported losses of around 350 million francs related to a decline in value in the 8.6% stake in the publicly traded Allfunds Group. As if that weren’t enough, the group’s exposure to the impact of the Russian invasion of Ukraine will penalise results by a total of CHF 200 million in negative revenue and loan loss provisions.
As a result, Credit Suisse “expects to report a loss” on April 27 when quarterly results are released.
Losses will be partially offset by a recovery of provisions of around 170 million francs in relation to the claims against the Archegos investment fund and by real estate gains of around 160 million francs, the bank said. Glass Lewis and ISS have recommended that shareholders vote against the bank’s board and management exemption from liability for the 2020 financial year at the general meeting of shareholders on April 29th.
Looking at the analyst notes, we are not surprised to see the following comments:
“What surprises us is that in mid-March, at an investor conference, CEO Thomas Gottstein was still talking about solid company performance in the first two months,” commented Luzerner Kantonalbank. “While we expected extraordinary negative impacts of around 600 million francs in the quarter, the total gross impact of 1,250 million francs and the net impact of around 900 million francs clearly exceed our assumptions. Another quarterly loss is one, clear disappointment, “said Bank Vontobel analyst Andreas Venditti.
Higher legal fees and another quarter in negative territory are the results of a never-ending story for the Swiss banking giant. The Bank has made extensive personnel changes in compliance and risk management teams but we again repeat that earnings risks are definitely more important than the implied stock price. Credit Suisse has continued to underperform the market, we reiterate our neutral rating at 8.5 CHF per share, valuing the Swiss entity with a ROTE adjusted on 6% based on FY results in 2022.
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