Jefferies no longer sees much value in Credit Suisse even at current depressed levels, and has downgraded the bank to “Hold”.

Omar Fall and team at Jefferies in their research note dated January 27, 2015 trimmed earnings estimates on Credit Suisse as they believe the bank would be impacted by a stronger Swiss franc, lower FICC revenue growth estimates and lower wealth management NNM.

“Forever growth” in WM challenged

Striking a cautionary note on Credit Suisse entering the “value trap” space, the Jefferies analysts challenge the current market perception of wealth management as in the midst of a secular growth trend driven by Asia and emerging markets.  They point out that the net new money (NNM) for CS is forecast to only hit 4% this year, down from pre-crisis level of 7%, and, moreover, the consensus is that NNM growth for both Credit Suisse and UBS remains at the 4% level out to 2016.

NNM for Credit Suisse and UBS

Taking a closer look at NNM by geography, the analysts point out that the very sizable bias of growth towards AsiaPac and emerging markets. As can be deduced from the following table, splitting NNM by client domicile indicates that just under 80% of organic growth at CS in 9M14 was sourced from emerging markets and Asia.

NNM split by client domicile Credit Suisse

The Jefferies analysts note their analysis indicates little true evidence of higher private banking ‘penetration’. Thanks to stronger dollar and a slowdown in key geographies, the analysts anticipate NNM trending to 2% CAGR out to 2016, or half consensus estimates.

IB footprint at risk

Fall et al. point out that in the last two years, Credit Suisse has outperformed peers in terms of FICC revenue trends. While these were up 8% for 9M14 on a USD basis at CS, European IBs were down 4%:

FICC revenue YoY change Credit Suisse

The analysts note Credit Suisse is underweight in rates and FX and overweight in the high yield space, which is suffering from the breakdown in the commodities complex. At the same time, the analysts note conditions in leveraged finance, another area of strength, have been optimal and will not benefit from eventually higher U.S. rates and an uptick in defaults. The Jefferies analysts anticipate FICC revenues down 3% YoY in 2015.

Credit Suisse walking a tightrope on capital

Thanks to the deterioration of the earnings picture, the Jefferies analysts lack confidence in the capital outlook at the group. They also draw attention to potentially higher capital requirements from Too-Big-To-Fail regime implementation in February.

As can be deduced from the following graph, the Jefferies analysts forecast a fully loaded CET1 ratio of 10.2% at Q4 2014, that would put CS marginally above its 10% target for YE 2014, and a 11.1% CET1 ratio at YE 2015, which is just above CS’ long-term target of 11%.

Credit Suisse capital ratio forecasts

The analysts note should “Too-Big-To-Fail” capital requirements exceed these targets, CS would be left with very little room to manuever and at the very least would put pressure on dividend payouts.

As can be seen in the following table, Jefferies trimmed earnings estimates on Credit Suisse by a sizable 35% in 2015 and 34% in 2016. The analysts note the impact of the recent removal of the CHF – EUR peg accounts for 4.4%pt of the 2015 and 4.2%pt of the 2016 revenue downgrades at group level. They also note the pinch would be felt hardest in wealth management where they assume a 12% reduction in AUM from the FX change.

CS estimate changes

The Jefferies analysts have thus downgraded Credit Suisse from “Buy” to “Hold” and pegged the current target price at CHF 19.60.