Two Surprising Winners In The Wake Of Brexit

Adam Fischbaum's picture

Thursday, June 30, 2016 - 12:30pm

by Adam Fischbaum

To paraphrase the late, great Hunter S. Thompson, "When the going in Europe gets weird, the weird go to Switzerland". And now, thanks to the Brexit vote, things are officially weird in Europe.

Throughout history, whenever things got dicey in Europe, people with assets have always fled to the safety of Swiss banks and even the country itself. Where were the von Trapps from "The Sound of Music" going to escape the Nazis? Yep. Switzerland. And my guess is that Captain von Trapp had some cash stashed in Geneva as well.

So will the new Brexit-induced cracks in the EU stimulate asset migration to Switzerland? I think so.

Switzerland is not part of the European Union (EU) or the common euro currency. However, the country maintains a solid, cooperative relationship with the EU -- and having a stable, standalone currency in the Swiss franc and a well-regulated, albeit private, banking system make Swiss banks an attractive option for fearful wealthy Europeans. 

Of course, customer and asset flows also mean profits which are why investors should have a look at Swiss bank stocks right now. Here are two timely ideas.

With a global financial services footprint, Credit Suisse Group (NYSE: CS) has always been viewed as an investment bank. However, of the company's revenues, 34%, about $35.1 billion in 2015, come from a strong, private banking franchise. And due to shrinking margins, capital intensiveness and limited opportunity in the investment banking business, Credit Suisse has shifted its focus to wealth management and private banking.  In March of this year, CS reduced its risk weighted assets from $85 billion to $60 billion, shoring up its balance sheet and giving the bank a more conservative profile. The company has been capturing market share among the wealthy in emerging markets such as Asia Pacific as well as concentrating on its developed market business in the United States and Switzerland.

Credit Suisse's strong brand name and solid platform should attract new clients as things get dicey. Analysts look for 2016 earnings per share (EPS) of 67 cents for the company, a significant turnaround from 2015's loss of $2.15. At $10.64, shares trade at a deep discount of just 40% to their tangible book value with a forward P/E of 15.5 and a 6.4% dividend yield.

While not as large a presence as Credit Suisse, Julius Baer Group, Ltd (OTC: JBAXY) still has a strong, 126-year old Swiss private banking pedigree. The bank focuses solely on wealth management and private banking.

For a bank in mainland Europe, the numbers are encouraging. Operating income for 2015 grew at a 5.8% rate year over year to $2.7 billion, up from $2.55 billion for the prior year. 2015 EPS before adjustments (mainly a settlement with the U.S. Department of Justice) grew by 19.7% to $3.27 versus 2014 results of $2.73. 

Julius Baer's real, organic growth was driven by the lifeblood of wealth management firms: assets under management (AUM). The firm's AUM grew by 3% to $304 billion from $295 billion while average AUM grew by a solid 5.8% from $277 billion in 2014 to $293 billion for 2015. If panic ensues in euroland, look for a healthy bump in that number. Currently, Julius Baer ADRs (American Depositary Receipts) trade around $7.65 with a 2.9% dividend yield.

Risks To Consider: On a macro level, while the British vote to leave the European Union was historic, the actual divorce hasn't happened. Britain still has to implement Article 50 of the European Union Lisbon Treaty which instigates negotiations for the actual withdrawal. That has not happened and some British constitutional scholars have expressed skepticism as to whether Parliament will ever implement the article. Much of the hand wringing may be for naught. 

Looking at the individual stock ideas, CS's global footprint and large capital markets exposure open up the risk of losses generated by financial market turmoil. However, the company's lowering of its risk asset profile and pivot towards the less volatile wealth management business is a step in the right direction. 

The biggest risk associated with holding Julius Baer is lack of transparency and liquidity for the stock. Finding research for the name was challenge even for me. The stock can also be thinly traded at times averaging barely 100,000 shares daily.

Action To Take: On average, Credit Suisse and Julius Baer shares trade at an attractive 64% discount to their 52-week highs with a blended dividend yield approaching 4.7%.  Financial fear and disruption within the European Union could drive wealthy Europeans into the reassuring arms of Swiss bankers growing assets, revenue and profits for the likes of Credit Suisse and Julius Baer. Bold and patient investors would also benefit and be compensated decently for their risk while they wait.

Editor's Note: A Texas financial publisher is making investors a $1 million bet that he claims they can't lose. He says it will work for anyone who takes him up on his proposal... And spells out the entire program here, including the numbers that prove it can work

Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.