DBRS Downgrades Credit Suisse Group to AA (low), Confirms Credit Suisse AG at AA, Trend Negative

DBRS Inc. (DBRS) has today downgraded its ratings for Credit Suisse Group AG (Credit Suisse or the Group), including its Senior Unsecured Long-Term Debt rating to AA (low) from AA and its Short-Term debt rating to R-1 (middle) from R-1 (high). The trend remains Negative. Credit Suisse Group AG is the top-level holding company. At the same time, DBRS has confirmed its ratings for Credit Suisse AG (the Bank) and related entities. Credit Suisse AG is the main operating subsidiary of the Group. The Senior Unsecured Long-Term Debt rating of the Bank has been confirmed at AA and its Short-Term Debt rating has been confirmed at R-1 (high). The trend remains Negative. Importantly, the Bank’s intrinsic assessment (IA) has been confirmed at AA (low).

In lowering the Group’s ratings to AA (low) from AA, DBRS has are now positioned these ratings one notch below the ratings of the Bank to reflect the recent changes in the regulatory environment in Switzerland. The Group’s regulator, FINMA, has laid out its strategy for the resolution of Global Systemically Important Banks (G-SIBs) in Switzerland, which includes Credit Suisse. This strategy utilizes the ‘single point of entry’ (SPE) approach, which calls for the creditors of the top-level holding company to bear a share of the losses, allowing the entire group to be recapitalized. DBRS had historically viewed the regulatory environment in Switzerland as focused on the supervision of the financial group as a whole. In DBRS’s view, this new regulatory approach warrants a one notch differential between the Bank and the Group reflecting the increased risk to creditors at the holding company. In general, DBRS typically has a one notch rating differential between banks and bank holding companies to reflect this additional risk.

Underpinning the Bank’s IA of AA (low) is the overall strength of Credit Suisse’s franchise, which is steered by a strong Private Banking & Wealth Management (PB&WM) franchise. This includes a leading position in private wealth management globally and a domestic Swiss business that provides a solid foundation and has strong market shares in corporate and institutional banking, in addition to private banking for high net worth individuals. These businesses are complemented by Credit Suisse’s investment banking (IB) franchise, which provides valuable products and services to PB&WM clients. While growing core revenues in a difficult operating environment featuring low interest rates, constrained capital markets activity, increased competition and expense pressures remains a challenge, DBRS notes that core revenues have held up in 9M13 and compare well to 2011/2012 levels, though still below 2009/2010 levels. DBRS is cognizant of improvements in Credit Suisse’s balance sheet with improved capital levels, ample liquidity, and an improving credit profile. With an SA-2 support assessment reflecting DBRS’s view that Credit Suisse is a systemically important banking organization (SIB), the Bank’s final ratings are positioned one notch above its IA at AA (low).

The continued Negative trend reflects DBRS’s assessment of Credit Suisse’s evolving risk profile and earnings power in light of the changing global operating environment, which is putting constraints on business practices and pressuring returns in certain businesses within its global capital markets operations. Currently in the process of reorienting its IB, DBRS sees Credit Suisse as committed to maintaining a sizable IB given its complementary nature with the PB&WM division. Credit Suisse has demonstrated some success in focusing on businesses which generate the necessary returns on allocated capital such as credit products, cash equities and prime services, while reducing certain fixed income businesses, such as interest rates and commodities, which do not contribute significantly to bottom line results. DBRS will continue to monitor the Group’s success in the transformation of its IB, demonstrated by sustaining revenues and earnings power in its operating businesses at a level that can support much higher capital requirements.

Also reflected in the Negative trend, DBRS expects that revenue growth will be difficult in the current environment, adding pressure to sustain expense reductions and improve efficiency. Positively, the Group has announced a run rate target in expense reductions of CHF 4.4 billion in 2015, of which annualized cost savings of CHF 3.0 billion have been achieved through 9M13. Credit Suisse also has some room to adjust its variable compensation expense within the IB, although its compensation/net revenue accrual of 41% in 9M13 remains fairly low as compared to peers. DBRS expects that further progress with the “One Bank” initiative, which promotes cross-collaboration across the divisions of the Group, could add a valuable contribution to revenue growth.

DBRS will continue to monitor the Group’s success with its strategic plan. Continued success in meeting or exceeding targets could result in a reversion to a Stable trend. Conversely, reversal of progress in business repositioning, if accompanied by weakness in delivering key performance goals could trigger negative rating pressure. Substantial litigation and reputational issues could also pressure ratings, particularly if DBRS perceives that these issues are causing damage to the PB&WM franchise.

At the request of the issuer, DBRS has discontinued the ratings of various issuances as the securities have been redeemed. These rating actions are detailed in the rating table below. Credit Suisse’s ratings, including its Senior Unsecured Long-Term Debt rating of AA (low), and the Bank’s ratings, including its Senior Unsecured Long-Term Debt rating of AA, are unaffected by these actions.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 13 September 2006
Most Recent Rating Update: 4 Oct 2011

For additional information on this rating, please refer to the linking document under Related Research.