DBRS: Credit Suisse Shows 4Q13 Core Business Momentum, But Legacy Issues Impact Overall Results

Summary:
•4Q13 net income of CHF 471 million, down 32% quarter-on-quarter (QoQ) as litigation costs impacted the bottom line; net revenues of CHF 6.2 billion improved 9% QoQ driven by momentum in core businesses
•Legacy issues continue to impact results, with a pre-tax loss of CHF 1.0 billion in 4Q13 in the non-strategic units (NSUs) driven by CHF 514 million of litigation charges
•DBRS rates Credit Suisse Group AG Senior Unsecured Long-Term Debt at AA (low) and Credit Suisse AG Senior Unsecured Long-Term Debt & Deposit at AA; all ratings have a Negative trend

DBRS, Inc. (DBRS) views Credit Suisse Group AG’s (CSG or the Group) 4Q13 financial results as reflecting momentum in its core businesses and progress with its strategic initiatives. However, the addition of CHF 514 million in litigation charges was a reminder of the potentially costly legacy issues that remain outstanding. Nonetheless, the Group’s focus on cost reduction is delivering a downward trend in expenses (ex-litigation) that is reflected in an annual run-rate expense savings of CHF 3.1 billion in 2013. In its core business results, which exclude the non-strategic units (NSU) and other one-off items, CSG achieved positive operating leverage in 2013, driven by expense reductions of 4%, as revenues were largely flat year-on-year at CHF 25.6 billion.

CSG’s powerful underlying franchise is reflected in revenue generation in Private Banking & Wealth Management (PB&WM) and Investment Banking (IB), with an approximate 50/50 contribution to core strategic net revenues and pre-tax income. Business momentum in PB&WM was evident in the strong net asset inflows in the quarter, with notable growth in emerging markets and significant asset management inflows in higher margin products. DBRS views this quarter as evidencing some success in improving the consistency of earnings in the strategic IB, which excludes the drag from the IB NSU. With sequential increases in revenues across most IB business lines, including debt and equity underwriting, advisory and equity sales and trading, the strategic IB generated a return of 19% on Basel 3 capital in 2013, up from 16% in 2012. DBRS views the returns in the core businesses as demonstrating Credit Suisse’s earnings generation capacity at a level that can support much higher capital requirements.

DBRS sees legacy issues at Credit Suisse as constraining, but manageable, with total assets in the NSUs of CHF 48 billion (5% of Group assets) and total leverage exposure of CHF 99 billion (9% of Group exposure) at year-end 2013, where this exposure is measured in calculating the Swiss leverage ratio based on the Swiss Financial Market Supervisory Authority (FINMA) framework. Positively from a credit perspective, CSG expects to run down its leverage exposure in the NSUs to CHF 25 billion by 2015 (2% of the Group’s long-term target for its leverage exposure). Legacy issues were highlighted in 4Q13 results with the additional litigation charges of CHF 339 million in the IB NSU, related to ongoing mortgage litigation, and CHF 175 million in the PB&WM NSU, related to the ongoing SEC investigation regarding the US tax matter. DBRS views the heightened focus on litigation and the uncertainty regarding the size and scope of the related settlements as having the potential to hinder the Group’s progress with its strategic objectives. That being said, DBRS expects these legacy issues to be manageable for Credit Suisse given its strengthened capital levels, ample liquidity, and improving credit profile.

DBRS rates Credit Suisse Group AG Senior Unsecured Long-Term Debt at AA (low) and Credit Suisse AG Senior Unsecured Long-Term Debt & Deposit at AA; all ratings have a Negative trend

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]