DBRS Ratings for Credit Suisse Group Unchanged After Q3 Earnings; Senior at AA, Trend remains 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 Q3 2009 results. The trend on all ratings remains Negative. The Group reported solid results for the third quarter including net income of CHF2.4 billion, corresponding to an ROE of 25%. Net revenues in the quarter were CHF8.9 billion as compared to CHF8.6 billion in prior quarter.

In maintaining the Negative trend, DBRS notes that the Group is only three quarters removed from the difficult 2008 in which Credit Suisse reported three quarterly losses and a full year loss. The global economy remains stressed and the Group’s prospects are inexorably tied to financial markets that remain fragile and continue to face significant challenges. That said, following three strong operating quarters and continued progress on executing on its integrated bank strategy, evidenced by CHF3.6 billion of year-to-date collaboration revenues and some positive flows in targeted areas of Asset Management, DBRS’s next rating action is more likely to be a reversion to a Stable trend. DBRS also notes positively that Credit Suisse continues to make progress in reducing exposures to legacy assets.

The Group’s ratings are underpinned by its leading global Private Bank, a strong Corporate & Institutional banking franchise in Switzerland and its Investment Bank (IB) which continues to make progress in repositioning itself to focus on client flow and facilitation, while becoming a more efficient user of Group capital. The Private Bank continues to attract assets across geographies with net new asset inflows of CHF11.2 billion in Q3 2009 and is benefiting from new hires.

IB results were solid again this quarter. Excluding losses resulting from the fair value of Company debt, this business segment reported pre-tax income of CHF2.0 billion, a slight increase from the prior quarter’s CHF1.9 billion. A 20% linked-quarter decline in operating expenses and a CHF220 million decline in provisions for credit losses from Q2 2009 drove the quarterly result, as revenue trends were somewhat less positive. The Group’s focus on client facilitation and flow trading resulted in weaker trading revenues in cash equities, rates and foreign exchange, reflecting lower volatility as well as typical third quarter seasonality. Total IB net revenues were CHF5.0 billion compared to CHF6.0 billion last quarter. Total trading revenues declined 19% from Q2 2009 to CHF4.3 billion. Key client businesses generated net revenues of CHF4.1 billion during the quarter, down from CHF5.3 billion last quarter due in part to subdued activity. Looking ahead the Group expects revenues from RMBS trading and certain areas of the rates business to decline as markets normalize and competition returns. Offsetting those trends, Credit Suisse sees better prospects for Leveraged Finance and Emerging Markets trading (historically strong areas for the IB), as the operating environment improves.

Credit Suisse’s core Private Banking business, including Wealth Management and the Group’s Swiss Corporate & Institutional operations, remains a relatively consistent performer and an important stabilizing factor underpinning the Group’s ratings. Overall, this segment’s pre-tax income fell 7% from Q2 2009 to CHF867 million. Wealth Management revenues declined 3% from the prior quarter to CHF2.4 billion, due to tighter gross margins on assets under management. The transaction-based margin contracted 5 bps, as product issuing fees and integrated solution revenues both declined reflecting seasonality, as well as client preference to invest directly in equities and bonds. Lower net interest income drove 5 bps of linked quarter contraction in recurring margin and was the result of higher funding costs. Reported results for Corporate & Institutional Clients were impacted by CHF61 million of losses on loan hedges. Underlying pre-tax profit (which excludes the change in fair value on the loan hedges) for this business was CHF205 million, down 1% from Q2 2009.

Asset Management, Credit Suisse’s third segment, reported pre-tax profits of CHF311 million up from CHF55 million in Q2 2009, as it benefited significantly from a CHF207 million gain on shares received in the Aberdeen transaction. There were positive trends. Unrealized losses on private equity investments declined again in the quarter. Asset management fees were up 5% from Q2 2009. Importantly from a strategic perspective, net new assets were up in the areas that Credit Suisse has targeted for growth, reversing prior quarter trends. Alternative Investment Strategies and Multi-Asset Class Solutions had third quarter net inflows of CHF1.4 billion and CHF3.9 billion, respectively. At period end, the Asset Management segment reported AUM of CHF428 billion, up 4% from the end of the second quarter.

Credit Suisse’s capitalization and funding remain strong. The Group has solid capital and continues to reduce risk. At 30 September 2009, the Group’s Basel II Tier 1 ratio was 16.4%, up from 15.5% at 30 June 2009, and its Core Tier 1 ratio was 11.3% at the end of the third quarter. Credit Suisse made further progress in de-risking the IB. Total IB risk-weighted assets were reduced a further USD 2 billion in the third quarter to USD 137 billion. Credit Suisse has been able to reallocate capital from businesses it is exiting to support its core businesses. Group-wide risk-weighted assets declined 5% in the third quarter to CHF222 billion. Credit Suisse’s customer deposit base of CHF280 billion at Q3 2009 is a key funding advantage for the Group.

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 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.