Credit Credit Credit

Credit Suisse hits 15-year low and the phoenix of energy

Equities 6 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Credit Suisse is the story of a long string of bad decisions but also a structurally weak European banking sector that 14 years after the Great Financial Crisis is still struggling with return on equity being above the cost of equity over an entire economic cycle. While financials in many ways are taking the elevator down, the energy sector is being catapulted back into a proper size of the overall equity market with Exxon Mobil as an example being up 71% this year and now the 11th biggest US publicly listed company on market value.


Does Credit Suisse profit warning paves the way for a takeover?

It is hard to remember when we were positive on European banks except for rare tactical cases. European banks remain structurally weak and yesterday’s profit warning from Credit Suisse indicating a potential loss in Q2 proves the point. Credit Suisse will likely see its investment bank division delivering a third straight quarterly loss driven by market share losses across all business lines. The Swiss bank has been hit over the years from the spectacular blow-up of the hedge fund Archegos and the collapse of its supply chain finance partner Greensill Capital. The bank came out with a long list of excuses for why the bank was doing badly from geopolitical tensions to abrupt changes to monetary policy.

The cold hard facts are that Credit Suisse has relentlessly destroyed shareholder value since the peak in 2007 and has not since late 1992 delivered a positive total return destroying capital a rapid pace when adjusted for inflation. Credit Suisse had some years after the Great Financial Crisis when it was delivering better return on equity (ROE) than the overall European banking sector but since 2011 its performance has continuously deteriorated relative to the industry. The current 12-month forward ROE is now only 3.9% which is well below the cost of equity. Credit Suisse is a symptom on European banks stuck in a prohibitive regulatory environment, low growth economy, and overhang of bad debt. It is difficult to be structurally positive on European banks.

Source: Bloomberg

Exxon Mobil is close to be back in the top 10 of S&P 500

Exxon Mobil, the biggest oil and gas company in the US, is up 71% this year taking the market value to $440bn as of yesterday’s close. This brings the stock to the 11th place in S&P 500 on market capitalization regaining some of the lost terrain for energy stocks in the S&P 500. Despite the recent rally Exxon Mobil is valued at 12-month free cash flow yield of 9% compared to around 6% for the MSCI World Index.

As we recently wrote in a note, energy stocks are the cheapest in 27 years, and they have rallied from just 2.4% of the total market value in the S&P 500 to 5.2% as of May with the long-term average at 7.5%. Under the assumption of an ongoing energy crisis and hangover from low investments over the previous 8 years, energy prices will continue to remain high and deliver high return on invested capital for energy companies. We remain structurally positive on oil and gas stocks.

Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.