Analyst Note| Johann Scholtz, CFA |
With its closest peers booking surging profits and smashing consensus estimates, narrow-moat, Best Idea, Credit Suisse Group's third-quarter 2020 earnings miss was disappointing. The consensus of analysts, polled by Credit Suisse, was looking for pretax profits of CHF 922 million for the quarter, Credit Suisse delivered CHF 803 million. Somewhat surprisingly, it was Credit Suisse's smallest business unit--its asset management business--that was the main culprit, although the Swiss universal bank and international private banking divisions did not meet expectations either. The investment banking business exceeded expectations materially, while central costs overshot substantially. Compared with the third quarter of 2019 profit before tax came in 38% lower, however if we exclude the capital gain booked during the third quarter of 2019 from the base, profit before tax was flat year on year. What was maybe most disappointing was that even with investment banking enjoying a purple patch--that has not been seen for over a decade--Credit Suisse could still not generate a solid double-digit return on equity, or ROE, during the first nine months of 2019 and the ROE for the third quarter was a paltry 6%. On the positive side the continued strong inflow of net new money into the wealth management business bodes well for the future, loan-loss provisions declined even more than expected and Credit Suisse committed itself to return CHF 2.1 billion-2.6 billion of capital to shareholders--this is 11%-13% of Credit Suisse's current market value and it is important to note that all of these distributions are before any capital return based on 2021 earnings. We are modelling a combined capital return (dividends and buybacks) of another CHF 1.6 billion for 2021. We reduce our fair value estimate to CHF 15.50/share from CHF 17.00/share previously.