2021 turned out to be a profitable year for banks. A steady improvement in the broader economic environment, net reserve releases, and solid credit quality supported their profitability. Further, increased deposits strengthened the balance sheet of top banks.
Come 2022, the increase in macro and geopolitical headwinds is taking a toll on the profitability of banks. Higher inflation, supply-chain issues, and the Russia/Ukraine conflict could continue to play spoilsport in the short term. However, broad-based loan growth, rising interest rates, and strong credit quality are positives.
As for Credit Suisse Group (GB:0QP5), there are no quick fixes to its legacy issues as the financial services giant continues to struggle.
Its legacy issues, including litigation provisions and negative consequences from its exposure to the failed Archegos Capital Management and Greensill Capital, took a toll on its performance in 2021 and resulted in hefty losses and reputational damage.
Hit hard by these events, Credit Suisse is focusing on strategic capital allocation on its core business and cost savings to fund growth initiatives. However, it seems that its problems are unlikely to end soon.
It recently announced that large legal provisions would impact its bottom line and expects to report a loss in Q1. Further, the unfavorable impact of the Russia/Ukraine conflict, a reduction in capital market issuances, and lower business activity are likely to hurt its margins.
Given the challenges, Deutsche bank analyst Benjamin Goy reduced his Q1 estimates. Goy added, “The first quarter was not an easy one for wealth management and parts of investment banking due to the macro environment and tough comps. Hence, we mark-to-market our Credit Suisse forecasts down as we did for the other Swiss banks.”
Commenting on Credit Suisse’s valuation, the analyst termed it as “undemanding.” However, Goy is upbeat about UBS and Julius Baer in the Swiss banking space due to the cheap valuation and better operational momentum.
Goy has a Hold recommendation on Credit Suisse stock with a price target of sFr.8 per share. This implies 11.5% upside potential over the next 12 months.
Bottom Line
While Credit Suisse is taking measures to transform its business, legacy issues and industry-wide macro and geopolitical headwinds could continue to remain a drag. Credit Suisse stock has received three Buy, nine Hold, and three Sell recommendations for a Hold consensus rating. Meanwhile, the average Credit Suisse Group price target of SFr.8.89 implies 23.9% upside potential from current levels.
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