Quant Corner: Credit Suisse moved to positive, alpha last week
Sell-side analysts have revised up their estimates on forward 24-month return on equity for Credit Suisse. Combined with a positive relative momentum, our model has changed its view to positive on Credit Suisse. Last week's views generated 1.1 percent alpha.
Credit Suisse is ahead of peers
Credit Suisse has come a long way following a couple of years of pressure on the top line and faltering profits. In the past 12 months, profits before provisions have bounced back forcefully to levels not seen in more than two years. Sell-side analysts have persistently upgraded their estimates for return on equity, which is now among the highest for major European banks (see table). Its pro forma Basel III Common Equity Tier 1 capital ratio could be better and is currently below the average. However, measured by the important Leverage Ratio, it is among the less leveraged banks. Remember, it was the future Basel III Leverage Ratio that forced Barclays into a large rights issue some weeks ago. Taking all information into account, our model has revised Credit Suisse to a positive view.
Views generated 0.5 percent alpha
Over the past week, the model's views generated 0.5 percent alpha with two negative views finally seeing negative performance and adding positively to alpha generation. The two best-performing banks among the positive views were KBC Groep and Societe Generale. The best performing bank among the model's views, which was also the biggest negative contributor to alpha, was HSBC, which is up almost 3percent over the past week.
Commerzbank is undecided
Commerzbank remains the model's least favourite bank and our Trade Idea from August 26 is still open. The trade idea was to sell Commerzbank on overvaluation and waning momentum with a target 8.00 and a stop at 9.07. The past 10 trading sessions have created a congestion area from 8.50-9.00 and traders seem to be undecided about where to take the stock.