Credit Suisse Group AG (ADR) (NYSE:CS) has not had a great run. In addition to a long-term trend of declining revenues, the company suffered recent embarrassment over its volatility index ETFs blowing up and lawsuits related to the stock. As the company reports earnings and addresses damage control over its ETFs, investors must decide if now is the time to take a position in CS stock.
Credit Suisse reported earnings this morning. And thus far, CS stock is up nearly 4%.
The CS earnings reported revealed revenue gains, continued losses
The company lost 2.1 billion Swiss francs ($2.24 billion) in the 4th quarter. Revenues came in for the quarter at 5.2 billion Swiss francs ($5.55 billion), a slight increase from 5.18 billion Swiss francs in revenue for 4Q 2016.
Annual losses for 2017 came in at 983 million Swiss francs ($1.05 billion). The loss includes a 2.7 billion Swiss franc ($2.88 billion) impact loss on the reassessment of deferred assets due to tax reform in the United States. This represented a third consecutive quarterly loss for the company.
Credit Suisse reported 20.9 billion Swiss francs ($22.32 billion) in revenue for 2017. This is a 5% increase from 2016.
Management attributed the losses to a three-year restructuring plan put forth by CEO Tidjane Thiam. The company wants to focus less on investment banking and more on private banking, which is less capital intensive.
Early indications show gains from this new focus for CS stock. But most of the media focus for Credit Suisse has reflected poorly on the company.
CS stock still plagued by controversy and recent history
The company’s latest controversy involves the Credit Suisse AG – VelocityShares Daily Inverse VIX Short Term ETN (NASDAQ:XIV). This fund bet against the volatility index. As long as the market rose and volatility remained low, XIV would rise.
The problem came following the 4.6% drop in the Dow Jones Industrial Average on February 5th. On that day, XIV fell by 95%, and Credit Suisse decided to shut the fund down, leaving investors with very little. Thiam says the fund will trade until tomorrow and investors will be paid on February 21st.
The company also faces lawsuits in the U.S. involving investments in CS stock.
These issues are merely the latest problems for the Swiss financial services company. CS stock remains one of the few to still trade below its 2008 lows.
Interestingly, the company weathered the financial crisis better than most banks, and it did not turn to the government for help. Its larger Swiss rival, UBS Group AG (USA) (NYSE:UBS) as well as foreign rivals such as Deutsche Bank AG (USA) (NYSE:DB) and Citigroup Inc (NYSE:C) relied on government assistance.
The Zurich-based financial services holding company has also not recovered from the financial crisis is with revenues. In 2009, revenues reached a high of 33.6 billion Swiss francs ($35.93 billion) and Credit Suisse has not seen that level since. Revenues for 2017 remain 38% below 2009 levels.
CS stock finds itself well-positioned to resume growth
Despite the shakeup, CS stock bulls remain optimistic. The restructuring may help the company turn the corner on this longstanding issue. Wealth Management grew by 13%. New assets under management grew by 27%. The company also found 3.2 billion Swiss francs ($3.42 billion) worth of cost savings, and all five divisions increased return on capital for the year.
By all financial indications, the stock appears poised for a recovery. Analysts expect profits of $1.42 per share in fiscal 2018. If that holds, that will place the forward price-to-earnings (PE) ratio at 13 for CS stock’s current price of just above $18 per share.
Investors also enjoy a current dividend yield of almost 4%. While its dividend has been volatile over the past few years, rising profits will likely translate into higher dividends over time.
While the lawsuits and the closing of XIV have brought negative publicity to Credit Suisse stock, these will likely amount to short-term drops at worst.
The bottom line on CS stock
Given a recovery in revenues after years of decline, now might be the time to take a position in CS stock.
The stock suffered a third consecutive annual loss in 2017. With its restructuring nearing completion, however, signs that the new CS can grow its revenues are appearing.
Also, with the coming low valuation and a 4% dividend yield, Credit Suisse stock looks to be a bargain.
Once the sting of the lawsuits and the closing of XIV fades, the years of pain CS stockholders have suffered should finally come to an end.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.