DBRS Confirms Credit Suisse Group’s AA Rating, Changes Trend to Negative

DBRS has today confirmed the ratings of Credit Suisse Group (Credit Suisse or the Group) and related entities, including its Senior Unsecured Long-Term Debt rating of AA, following the release of the Group’s fourth quarter and full year 2008 results. At the same time, DBRS has changed the trend on all ratings to Negative from Stable. The Group’s results showed a sizable CHF6.0 billion fourth quarter loss, which resulted in a full year loss of CHF8.2 billion.

The trend change reflects the challenges that Credit Suisse faces as it seeks to sustain its underlying earnings while restructuring its investment banking segment (IB) and pursuing greater efficiency across its franchise in a still difficult operating environment. Even with the Group’s resilient franchise, earnings growth is likely to be more challenging to achieve with financial markets still disrupted and the rapid economic slowdown becoming more evident in most of the Group’s international markets. Significant markdowns on legacy assets in the IB still plagued the Group in Q4 2008. Although write-downs and dispositions have significantly reduced remaining legacy exposures, the rapid economic slowdown continues to take a toll on market valuations and these exposures still pose some risk. While the restructuring of the IB is positive, it means near-term costs from repositioning this segment and exiting certain businesses while markets are volatile.

Though capital markets businesses bore the brunt of the market disruptions, 2008 was also a reminder of the risks in “low-risk” businesses in difficult markets, as the Group incurred significant expense as it acted to protect its reputation and franchise. DBRS also sees deteriorating credit trends and increasing credit costs across the businesses adding potential stress on earnings. However, with most of its commercial and retail lending focused in Switzerland, the Group is benefiting from this country’s relatively moderate economic slowdown. In Wealth Management, growth of underlying earnings will have to overcome adverse factors such as the lower client asset base due to market declines, reduced client appetite for risk taking, lower client activity, reduced leverage and elevated credit provisions.

In confirming the ratings, DBRS recognizes the strength of the Group’s core private banking franchise and the strong positions of its businesses, as well as the potential in its IB franchise. Strengthened capitalization, a sound funding profile and strong liquidity are also important underpinnings. The Group’s Wealth Management franchise is among the market leaders globally and is successfully increasing market share in new markets. Credit Suisse continues to invest in Wealth Management, developing its onshore private banking franchise in most markets, including the United States.

Credit Suisse also benefits from the very strong position of its Corporate & Retail Banking business, a leading bank in Switzerland. This unit produced a record CHF1.8 billion of pre-tax earnings in 2008. In Asset Management, Credit Suisse is also adjusting its business mix to leverage its overall franchise. It sold much of its traditional long-only global investors business, where it lacked a competitive advantage, to concentrate on the Group’s strong alternative investments business and asset allocation products. After disappointing earnings in 2008, the changing mix may bring greater stability in 2009.

Even within the IB, Credit Suisse has a range of product lines that have continued to perform well during the market turmoil, notably cash equities, interest rate products and foreign exchange. These product lines demonstrate the Group’s strong platform for generating recurring earnings in the IB as the new strategy is implemented. In December, Credit Suisse accelerated the process of repositioning its IB, reducing capacity in structured product origination and significantly reducing proprietary trading activities. DBRS views the decision to focus on flow businesses and the facilitation of client transactions for both IB clients and Private Bank clients as sound. This approach also leverages a broader strategy that Credit Suisse is already engaged in of increasing client activity through collaboration across business units. If successfully executed, this focus in the IB can generate attractive returns and reduce earnings volatility. With less proprietary risk and reduced need for balance sheet positions in potentially illiquid assets, this strategy also frees up capital that can be deployed in other businesses.

Going into 2009, Credit Suisse’s capitalization and funding remain strong. The Group has raised capital and reduced risk. At year-end, the Group’s Tier 1 ratio was 13.3%, a level ahead of regulatory requirements for 2013. The Group’s deposit base has remained stable (CHF266 billion at 31 December 2008) and continues to fund the Company’s entire CHF227 billion loan portfolio. In addition, Credit Suisse maintains a large pool of liquid assets and at year end had CHF136 billion of assets pledgeable for liquidity from various central bank facilities.

In DBRS’s view, Credit Suisse Group benefits from the domestic systemic importance of its bank subsidiary within Switzerland, as well as the importance of the Group for the Swiss financial system’s position in global financial markets. The bank is not only important for the banking system in its role as an intermediary and participant in the savings market and payment system but also for the whole economy, in view of its size, the overall importance of the banking industry in Switzerland and its reputation in the world as a “safe haven.” Though the Group has to date declined support from the Swiss government, in DBRS’s view, Credit Suisse is highly likely to receive some form of timely systemic support should it be necessary.

The Group has generally fared better than many financial institutions with significant capital markets businesses and is viewed as a strong and stable counterparty (as evidenced by Private Banking and Prime Brokerage asset inflows). Nevertheless, it is facing a period of uncertain financial markets across its global franchise that may be exacerbated by the abruptness of the slowdown across these economies. In DBRS’s view, any significant deterioration in the Group’s performance in the coming quarters that indicates a sustained weakening in its prospects or a decline in its franchise strength, could lead to a downgrade. Alternatively, should Credit Suisse report solid results in upcoming quarters and restore the IB’s profitability in an improving operating environment, the trend could revert to Stable.

Notes:
All figures are in Swiss francs unless otherwise noted.

This rating is based on public information.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our website under Methodologies.

This is a Corporate (financial institution) rating.