DBRS Ratings Unchanged After Q2 Earnings of Credit Suisse Group; Senior at AA, Trend Negative

DBRS has today commented that its ratings of Credit Suisse Group (Credit Suisse or the Group) and related entities, including its Senior Unsecured Long-Term Debt rating of AA, are unchanged following the release of the Group’s Q2 2009 results. The trend on all ratings remains Negative. For a second quarter, the Group reported solid results including net income of CHF 1.6 billion. Excluding various one timers related to spread tightening on its own debt, the Huntsman settlement and a discrete tax benefit, Credit Suisse generated an underlying profit of CHF 2.5 billion, up 62% from underlying Q1 2009 results. This underlying profit corresponds to a strong ROE of 27.4% for Q2 2009. Underlying net revenues were CHF 9.8 billion, as compared to CHF 8.9 billion in the prior quarter.

In DBRS’s view, Credit Suisse’s strong franchise and financial fundamentals, including solid capital levels, have enabled it to emerge from a tumultuous 2008 in a better position than many peers. The Group’s ratings are underpinned by its leading global Private Bank, a strong retail and commercial banking franchise in Switzerland, and its repositioned Investment Bank (IB). The IB has made appreciable progress in repositioning itself to focus on client flow and facilitation, while de-emphasizing proprietary risk taking and reducing origination capacity. The Private Bank continues to attract assets, including CHF 10.7 billion of net new assets in Q2 2009, with positive flows across geographies.

In maintaining the Negative trend, DBRS notes that the Group is just two quarters removed from a significant quarterly loss, having reported three quarterly losses and a full-year loss in 2008. The global economy remains stressed and the Group’s prospects are linked to financial markets that continue to face significant challenges. Credit Suisse still has exposures to legacy assets, most notably CHF6.6 billion of CMBS, which had net write-downs of CHF 307 million in Q2 2009. However, sustained improvement in its performance as indicated by two strong operating quarters, especially for the repositioned IB, and continued progress on executing its integrated bank strategy, as evidenced by CHF 2.5 billion of 1H 2009 collaboration revenues, are reducing the negative pressure on the Group’s ratings.

Excluding the noted one-timers, the IB had a strong quarter. Pre-tax segment income was CHF 2.4 billion on net revenues of CHF 6 billion. Key client businesses had another strong quarter with revenues of CHF 5.3 billion, down moderately from CHF 5.6 billion (excluding gains on debt) in Q1 2009. Results reflected strength in equity underwriting, good trading results across most products, and a record revenue quarter for prime services.

Credit Suisse’s core Private Banking business, including Wealth Management and the Group’s Swiss Corporate & Retail Banking operations, was again a relatively consistent performer this quarter and remains an important stabilizing factor underpinning the Group’s ratings. Private Banking revenues increased 3% from the prior quarter to CHF 3.0 billion, benefiting from higher transaction-based revenues in Private Banking, which were offset by weaker lending margins in Corporate & Retail Banking. Segment pre-tax income fell 6% from Q1 2009 to CHF 935 million for Q2 2009. Loss provisions of CHF 75 million (up CHF 30 million from last quarter) in Corporate & Retail Banking and a CHF 100 million insurance settlement gain in the first quarter accounted for this decline. The increased provisioning was related to Credit Suisse’s CHF 52 billion corporate and institutional loan portfolio which, in DBRS’s view, remains high quality and sufficiently granular. The Group’s asset quality continues to benefit from Switzerland’s relatively moderate economic slowdown. At 30 June 2009, this segment’s Assets Under Management (AUM) were CHF 862.2 billion up 6.6% from the end of the first quarter.

Signs of improvement were also apparent in Credit Suisse’s other segment, Asset Management, which swung to a modest Q2 2009 pre-tax profit of CHF 55 million after a pre-tax loss of CHF 490 million in Q1 2009. Write-downs on private equity investments declined significantly and asset management fees were up 10% from Q1 2009. Segment AUMs increased 1% in the quarter to CHF 410.7 billion due to market movements. Net new asset outflows of CHF 4.1 billion offset somewhat the effect of higher markets, as the Group saw outflows across categories, not just de-emphasized asset classes.

With positive earnings and ongoing risk reduction, Credit Suisse continues to bolster its capitalization. At Q2 2009, the Group’s Basel II Tier 1 ratio was 15.5%, up from 14.1% at Q1 2009, while its Core Tier 1 ratio was 10.4%, providing a substantial cushion over regulatory well-capitalized levels. Further progress in de-risking the IB reduced total IB risk-weighted assets by an additional 10% in Q2 2009 to USD 139 billion. Risk-weighted assets in the ongoing IB businesses were just USD113 billion at Q2 2009, below the Group’s end of year target of USD 135 billion. Funding remains sound with the Group’s customer deposit base of CHF 295 billion continuing to fund the entire loan portfolio. Further bolstering liquidity, Credit Suisse maintains a large pool of liquid assets and had CHF 133 billion of assets pledgeable for liquidity from various central bank facilities.

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

This rating is based on public information.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (financial institution) rating.