Credit Suisse share price braces for strategic overhaul update

Credit Suisse [CS] may be wrapped up in a string of scandals, management reshuffles and a strategic overhaul, but investors’ focus is expected to turn its third-quarter results, which are due to be announced before markets open on 27 October.

Analysts have downbeat forecasts for the embattled Swiss lender’s upcoming results. Zacks analysts expect revenue to fall 35.7% year-over-year to $3.8bn, with losses estimated at $0.13 per share. If these estimates are reached, this would represent a 176.5% drop year-on-year.

Anti-corruption and banking malpractice allegations have dogged Credit Suisse in a year that would have been challenging enough given the economic headwinds facing businesses.

Besides poor financial performance, Credit Suisse has suffered a string of malpractice allegations this year. After reports in February linked the Swiss banking giant to clients involved in a range of illegal activity, news broke on 11 October that the bank is under investigation by the US authorities for allegedly assisting clients in hiding assets.

The date of the upcoming results coincides with a monetary policy meeting of the Governing Council of the European Central Bank (ECB) in Frankfurt. According to a poll by Reuters, observers expect the ECB to increase key interest rates by as much as 75 basis points in an effort to control inflation, which is currently running at five times the central bank’s 2.0% target.

Credit Suisse shares halve in YTD

The Credit Suisse share price has tumbled 49% in the year-to-date (through 25 October), with the stock suffering a challenging macroeconomic environment alongside a series of errors and scandals on the part of the Swiss banking giant.

In contrast, the iShares Global Financials ETF [IXG], in which Credit Suisse has a 0.18% weighting as of 24 October, fell 15.9% over the same period, reflecting the fact that global financial stocks have all struggled this year and highlighting the fact that Credit Suisse has significantly underperformed the majority.

In February, a ‘Panama Papers’-style leak exposing Credit Suisse’s secretive business operations revealed links to clients involved in serious crimes, from torture, to drug trafficking, money laundering, corruption and murder. Credit Suisse rejected the allegations in a statement, attributing the reports to “selective information taken out of context, resulting in tendentious interpretations of the bank’s business conduct.” Nevertheless, Credit Suisse’s share price fell 3.9% between 18 February and 22 February as the allegations came to light – and have only slid further since.

More recently on 11 October, the Credit Suisse share price tumbled another 5.4% upon news of the more recent investigation regarding whether the Swiss bank helped US clients hide assets.

Investment banking arm overhaul

Credit Suisse posted revenues at a decline of 28.6% year-on-year to ​CHF3.​6bn. Thomas Gottstein, CEO of Credit Suisse, described the results as “disappointing”.

“The bank’s performance was significantly affected by a number of external factors, including geopolitical, macroeconomic and market headwinds,” Gottstein continued, adding that the “challenging circumstances” meant the results overshadowed the underlying strength of the bank’s four divisions.

The results promised a strategic review aimed at bringing the bank’s absolute cost base below CHF15.5 bn, as well as a progress report, including “specific performance goals,” to arrive with its Q3 results.

The results also announced the commencement of a move to overhaul the bank’s investment banking arm. The division is in the process of being completely restructured, and may cease to exist in its current form. The current CEO of the investment banking division, Christian Meissner, is expected to leave soon as part of the restructure.

Details of the overhaul strategy, including a confirmation of Meissner’s departure, are expected to be included in the announcement this Thursday, and investors’ reception of these plans will be a key driver of the stock’s price movements following the announcement.

Analysts call for Credit Suisse to raise capital

Johann Scholtz, equity analyst at Morningstar, told Capital.com that “in the absence of any new information around asset-quality concerns, we do not believe Credit Suisse is at risk of failing… However, we believe that Credit Suisse needs to raise capital to address wholesale funders’ fears.”

Analysts across the board appear to share this pessimism towards Credit Suisse. Among 22 polled by CNN Money, 13 give the stock its ‘hold’ consensus. Of the remaining nine, seven rate the stock ‘sell’, one calls it an ‘underperform’ and just one analyst is giving a positive rating of ‘outperform’. None are advising to ‘buy’.

Among 18 analysts offering 12-month price forecasts for Credit Suisse, the median estimate of $5.25 implies an 8.5% upside over the next year. The high target of $6.84 would see the stock gaining 41.3%, while the low target of $4.00 envisages further losses for the stock, of 17.4%, from the latest close price of $4.84.