DBRS Comments on Credit Suisse Group’s 3Q13 Results; Senior at AA, Trend Negative

DBRS Inc. (DBRS) has today commented on the 3Q13 results of Credit Suisse Group (Credit Suisse or the Group). DBRS currently rates Credit Suisse’s Senior Unsecured Long-Term Debt at AA, with a Negative trend. Credit Suisse reported net income attributable to shareholders of CHF 454 million on net revenues of CHF 5.7 billion. On an underlying basis; which assesses operating results and excludes certain items, such as the valuation impacts from movements in Credit Suisse’s credit spreads, restructuring costs, and business disposals, the Group reported net income of CHF 698 million in 3Q13, down from CHF 1.0 billion in 2Q13 and CHF 1.1 billion in 3Q12.

Highlights of the quarter include continued strength in the core businesses of wealth management and private banking supported by strong net asset inflows, and continued strengthening of the balance sheet through reduced leverage and increased capitalization. The Group also made progress in meeting targeted cost reductions and demonstrated some ability to adjust compensation within the IB to the weaker environment with lower accrual. Offsetting these positives, weak and inconsistent performance within the Investment Bank (IB), additional non-strategic exposures and the cost of restructuring continue to drag on overall profitability. After another quarter of mixed results, DBRS remains concerned about the Group’s ability to improve the consistency of its financial performance as it adjusts to the difficult environment.

Private Banking & Wealth Management (PB&WM) revenues were largely stable, down 3% QoQ to CHF 3.3 billion, and pre-tax income was CHF 1.0 billion. The segment continued to attract new assets, notably from ultra-high net worth clients and from the emerging markets. With net new assets of CHF 27.7 billion in 9M13, assets under management (AuM) rose to CHF 1,268 billion.

Reduced client activity and an uncertain operating environment, however, negatively impacted IB revenues, which were down by 25% QoQ to CHF 2.6 billion with sequential revenue declines across all business lines. A notable driver of this decline was fixed income sales and trading, which experienced a reduction in net revenues of 34% QoQ, as interest rates, foreign exchange and commodities revenues were impacted by reduced client activity. With pre-tax income of only CHF 229 million in 3Q13, IB performance was particularly weak, when compared to CHF 754 million in 2Q13 and CHF 483 million in 3Q12. Despite the Group’s success in lowering its risk profile and shifting towards a more client-focused model, the IB continues to add volatility to overall results, as the IB’s contribution remains sizeable (52% pre-tax income in 9M13). DBRS notes that the Group’s overall profitability remains very dependent on a segment of businesses that are not producing consistent results.

Credit Suisse also announced that it will add a further CHF 74 billion in exposure to its non-strategic business unit, largely resulting from the restructuring of its interest rates business, which will move legacy non-Basel 3 compliant and capital intensive positions out of the operating business unit. This shift raises total non-strategic exposure to CHF 123 billion. DBRS views this level as still sizable given the significant restructuring and deleveraging that the Group has already undertaken. Separate non-strategic units have been created within each business unit with total non-strategic exposure within IB of CHF 100 billion, or 19% of IB assets, and within PB&WM of CHF 23 billion, or 8% of PB&WM assets.

The Group’s liquidity and funding profile remains sound and it maintains strong regulatory capital ratios. With about 34% of the balance sheet match-funded and substantial excess short-term liquidity, including unencumbered liquid assets of CHF 153 billion at 3Q13, Credit Suisse considers that its Basel 3 liquidity coverage ratio and net stable funding ratio are well in excess of requirements. The Group reported a Basel 3 Tier 1 common ratio of 16.3% (phase-in) and 10.2% (look-through).

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]