Credit Suisse Group (CS) has gotten hit with a big earnings loss for 2015 and concerns over its loan portfolio. Like many banks, it is difficult to analyze as you do not know what its loan portfolio looks like.
Sales in 2015 were CHF23.797 billion, down 9% from 2014 at CHF26.242 billion. Provisions for credit losses were CHF324 million in 2015 and CHF186 million in 2014. Earnings for 2015 were a loss of CHF2.944 billion compared to last year's gain of CHF1.875 billion. I'm not going to translate into U.S. dollars as the franc and dollar are almost at parity ($1.01 buys one franc).
In the fourth quarter of 2015, the bank reported a CHF6.441 billion loss. This breaks down to: CHF3.8 billion in goodwill impairment, CHF355 million in restructuring, CHF564 million in litigation, a loss in its Strategic Resolution Unit of CHF1.122 billion, and a loss on its debt valuation of CHF697 million. The goodwill impairment had to do with its acquisition of DLJ in 2000.
The Tier-1 Capital Ratio is listed at 11.4%. According to this banking web site, Tier-1 Capital is defined as, "Accumulated Common Stock Value + Retained Earnings + Accumulated Other Comprehensive Income (AOCI) + Deductions & Adjustments + Noncumulative Perpetual Preferred Stock (incl. Surplus) = Common Equity Tier 1 Capital." A bank must have over 6% to considered well-capitalized.
David Herro of Harris Associates says that the bank does not need additional fund raising. Harris is one of the largest shareholders but has gotten smoked in its position. JP Morgan has downgraded the stock and has noted that Credit Suisse will have problems stemming from weak commodity prices. It's the bank's exposure to emerging markets and high yield debt that has scared off analysts. The bank's debt and credit default swaps to insure the debt have gotten beaten up too.
The Fixed Income Sales and Trading Division saw sales drop from CHF6.094 billion in 2014 to CHF4.7333 billion in 2015. Of its lending, $9.1 billion was to the oil and gas industry, and 81% of that was North America and 19% in other countries. Fifty-eight percent of those loans were to investment grade companies and the rest to companies that were not investment grade (or not graded at all).
Credit Suisse showed CHF802.805 billion in total assets and CHF272.995 in total loans. Tangible equity was CHF39.378 billion. Tangible equity excludes goodwill, intangibles, and other accounting gimmicks. Tier 1 Common Equity is CHF32.9 billion. So if enough of the bank's loans went sour, equity would be wiped out. And here is the rub — if the equity is wiped out, then Credit Suisse goes into bankruptcy.
The bank has a $2.9 billion global distressed portfolio, $11.7 billion in leveraged finance, and $800 million in collateralized loan obligations. Management plans on IPOing a division to raise capital.
I'm not going to go into asset management and all of that stuff. It doesn't really matter. This is a banking and liquidity story. Long term debt of Credit Suisse is "A" rated by S&P. In 2008, the bank was forced to raise CHF10 billion from Qatar Holding LLC. The bank held everything that you did not want to own back then: CDOs, CMOs, MBOs, etc.
I'm not too impressed with the research that I've read, nor the articles that are out there. Too much of it focuses on profitability and not enough on the loan portfolio. I would need more information on the loan portfolio to come up with an opinion on the stock. Obviously, if I can't get enough information, I can't give a buy or sell recommendation. Every piece of information that you read on Credit Suisse that does not have to do with its loan portfolio is really a waste of time. That is the only thing you should focus on.
