DBRS: Credit Suisse 1Q Strategic Results Solid and Show Momentum in PB&WM; Legacy Headwinds Remain

Summary:
• 1Q14 net income in strategic businesses of CHF 1.4 billion on net revenues of CHF 6.6 billion highlighted by continued momentum in Private Banking & Wealth Management businesses.
• Legacy issues remain a headwind, with a net loss of CHF 539 million in non-strategic units (NSUs) in 1H14, but CSG continues to make progress both in reducing exposure in NSUs and with legal settlements.
• 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) considers Credit Suisse Group AG’s (CSG or the Group) 1Q14 financial results as demonstrating generally solid performance in strategic businesses, highlighted by continued momentum in Private Banking & Wealth Management (PB&WM). PB&WM reported strong net new assets in strategic businesses of CHF 16.0 billion, driven by strong inflows in Asia-Pacific and Switzerland. While the Group has made progress with its strategic initiatives, including reducing exposures in NSUs, legacy issues are still a challenge. The CHF 600 million in litigation provisions in 4Q13 was a reminder of the potentially significant legacy issues that remain outstanding.

Importantly, CSG settled two key litigation issues in 1Q14, which were recorded in 4Q13 financials. These included a settlement of CHF 175 million with the SEC related to US tax matters, with the full amount charged to litigation provisions, and a settlement of USD 885 million with the Federal Housing Finance Agency related to the sale of mortgage-backed securities. This was partially covered by existing reserves and with an after-tax charge of CHF 275 million. DBRS views positively the finalization of these settlements, as it reduces the uncertainty factor around the potential cost of legacy issues. While these sizable charges drove a consolidated net loss of CHF 476 million in 4Q13, DBRS views the invasion of capital from the loss as minimal and capital levels at the Group remain solid.

Some weakness was evident in the Investment Bank (IB), which primarily reflected the difficult operating environment in the quarter. Given that Q1 is typically a strong quarter in the IB businesses, the trend of declining revenues throughout 2013 with only a slight uptick in 1Q14 does not bode well for IB revenue growth in the near-term. Lower client activity levels will likely continue to pressure net revenues sector-wide. Across the industry, profitability and returns are also pressured by increased compliance costs, and liquidity/capital requirements, as the industry adjusts to the still challenging regulatory environment. DBRS expects that as CSG refocuses its IB business mix on less capital intensive, higher returning businesses where it has better market positioning, earnings will improve as demand picks up and clients re-engage.

DBRS views the linkages between PB&WM and IB as providing valuable opportunities for revenue growth through CSG’s “One Bank” initiative. Collaboration revenues of 16% of total net revenues provide some indication of the Group’s success in this critical cross-selling strategy. While below CSG’s target range of 18% to 20% of total net revenues, DBRS sees significant opportunity for growth given the Group’s extensive product capabilities. An area that offers notable growth potential is lending to ultra-high net worth clients within PB&WM, which provides the opportunity to broaden and deepen relationships with this important client base by leveraging collaboration across its franchise.

DBRS continues to monitor the Group’s success with its strategic plan, including meeting or exceeding targets and progress in business repositioning.

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 unless otherwise noted.

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