In its recent report, Deutsche Bank Market Research revealed that Credit Suisse Group AG (NYSE:CS) is heavily discounted. In the beginning of this year, that seemed reasonable, due to the bank’s capital deficit, but no such deficit exists now. It is ranked among the top three in almost all the areas it has chosen to compete in. Deutsche Bank has upgraded its recommendation for Credit Suisse Group AG (NYSE:CS) to Buy, with a target price of 23 Swiss franc.
The next few quarters may prove volatile for Credit Suisse Group AG (NYSE:CS), but that would be the case for the entire European banking system. There are three strong reasons that make Credit Suisse a promising bet.
1- The bank has lost market share in FICC sales and trading. But, Deutsche Bank AG (USA) (NYSE:DB) (ETR:DBK) thinks that Credit Suisse Group AG (NYSE:CS) has a stronger FICC franchise than usually perceived. And other than FICC, Credit Suisse is among the top three in all the businesses it operates in. It holds second spot in Swiss retail and small corporate banking. Credit Suisse is number two in private banking and is ranked third in investment banking. So, even in the volatile economy, it will have the advantage in winning a significant number of whatever business is available.
2- Deutsche Bank AG (USA) (NYSE:DB) (ETR:DBK) is quite positive on the operational leverage of Credit Suisse. The bank is cutting 3 billion Swiss franc in costs, of which 2 billion has already been achieved in H1 of 2012. This is the biggest source of operational leverage. The bank’s const:income ratio is comparatively high, so its earnings will increase a lot, even with the small improvement in revenues. Another source of operating leverage would be the natural run-off of bonus charging.
3- The current capital position of Credit Suisse is much better than previously, thanks to the capital raising earlier this year. Even today there is some controversy over its raw TBV / tangible assets leverage ratio. CS’ raw tangible equity to tangible assets ratio would be less than 3 percent. However, Deutsche Bank thinks that CS can improve it by shrinking its repo book.
Deutsche Bank valued each of the CS’ business lines for sustainable profitability levels and then aggregated the divisional valuations to sum up the total value of Credit Suisse. Based on the sum-of-the-parts valuations, the target price is set at 23 Swiss franc. However, Credit Suisse is exposed to significant market risks, due to its heavy mix of private banking and investment banking.
If European leaders and ECB fail to take any strict measures to contain the crisis in September, Credit Suisse may miss the forecasts.