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Bear of the Day

Founded in 1856 and headquartered in Zurich, Switzerland, Credit Suisse (CS - Snapshot Report) is a leading global private bank and wealth manager. The bank has operations in over 50 countries and approximately 48,200 employees worldwide. Falling estimates sent the stock to a Zacks Rank #5 (Strong Sell) recently.
Penalty for Mortgage Practices
According to WSJ, Credit Suisse is among the major European banks that have mortgage practice cases pending for settlement with the US authorities. The bank had only $1.6 billion of provisions at the end of 2015, and it hasn’t added to the reserves in the first half of 2016. And with its capital ratio of just 11.8%, the bank is among the worst positioned to absorb a high mortgage penalty.
CEO Expects a Challenging Third Quarter
Speaking at an investment conference in London, the bank CEO Tidjane Thiam said that the trend of depressed client activity seen in the previous quarter had continued into the third quarter.
Equities business’ contribution to overall results is likely to be weak while wealth management unit will continue to see outflows.
The bank expects to cut about 1,200 jobs by the end of 2016, in addition to 4,800 job cuts already made as a part of ongoing restructuring.
Regularization Outflows
For many decades, Swiss banks benefitted from deposits made by non-resident clients that were not disclosed to tax authorities in their home countries. However, a new global automatic exchange of information program will be adopted by about 50 countries from next year, which will facilitate sharing of details of financial assets owned by nonresidents.
Credit Suisse expects about 5 billion Swiss francs in “regularization” outflows this year as foreign clients withdraw funds from their hidden accounts to pay taxes.
Brexit Woes
European banks’ shares were hammered after Brexit vote as it could cause a recession in the UK and increase in loan losses. These banks have a strong presence in London and their cross border trading and clearing operations could also suffer if Britain leaves the union.
The Bottom Line
After strict regulatory norms imposed on big banks, they have been finding it difficult to generate profits in their investment banking and trading businesses. Rising market volatility has also impacted their traditional businesses.
For Credit Suisse, in addition to the above, the possibility of a stiff mortgage practice related penalty and continued outflows from wealth management business have made the operating environment quite challenging. Investors should avoid the stock for the time being.
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