Quick Value 4.26.21 ($CS)
Credit Suisse - One man's trash is another's treasure?
Market Performance
Welcome back!
Quick Value took a brief hiatus last week for a much needed, lengthy family vacation. Back in action this week!
Market Stats
There are plenty of stats and charts to catch up on after missing last week’s QV post, but I wanted to stick with the retail spending data that came out… Retail sales grew 9.8% from Feb to March and grew ~28% from March of 2020 (YoY).
I understand we’re now lapping easy comparisons from the most painful part of the COVID shutdowns in 2019 but the retail sales data are crazy… Consider the comparison to where we were in March of 2019… It’s a 20%+ jump from Mar19 to Mar21.
There was a good snippet from Jamie Dimon’s shareholder letter (CEO of JPMorgan) highlighting the strength of consumer finances — something I feel like I’ve been saying for a while now? — consumer balance sheets best shape in 40 years, plenty of excess cash, euphoric attitude around end of COVID, etc., etc.
Quick Value
Credit Suisse AG ($CS)
It’s hard not to look at a quickly evolving disaster scenario and Credit Suisse is pretty ugly…
At $10/share, the stock is still well off lows from 2020 in the $6-7 range. (Just a heads up that the ticker $CS is in USD while company reports / financials are in CHF — this is a Swiss company.)
I won’t rehash the news but a quick synopsis is that CS is taking a multi-billion dollar hit from a failed hedge fund (Archegos) and supply-chain finance funds (Greensill). With only 43bn in equity at the end of 2020, there wasn’t / isn’t much room for huge write-offs.
What really has folks worried is the adage that there’s never just one cockroach… CS has had problems with risk management in the past ($450m here, $100m there, and another $850m) — all of these recent too!
CS currently trades at CHF10 per share with 2.4bn shares outstanding for a 24bn market cap. As dire as the situation seems, the bank was profitable in both 2019 and 2020 to the tune of 3.4bn an 2.7bn in earnings (9x 2020 earnings). First quarter 2021 was essentially breakeven following a CHF4.4bn provision for losses from bad investments.
First quarter 2021 results were pretty solid when looking past the portfolio mishaps… Revenue grew 31% as both segments (wealth management and investment banking) grew nicely.
After a period of restructuring, the business started to gain some momentum in 2018-2019 and again in 2020 with the rise in capital markets activity. Management is shooting for a 10-12% ROE on tangible equity which would equate to ~CHF1.50 per share in earnings.
Book value was CHF15.80 per share at end of 2020 and looks to be around CHF16.10 at 1Q21 following an equity raise and heavy provisions for investment losses. So current share price is around 0.6x price-to-book value.
Long-term price-to-book ratio is around 0.72x so a pretty wide discount at today’s price.
While the company has started to take action to mitigate future risky bets; there’s still a good chance that some positions could go bad in the future. After Q1 losses and the capital raise, leverage is right in-line with other European banks like UBS and ING while much lower than the troubled Deutsche Bank.