DBRS: Credit Suisse Reports Solid 3Q14 Results Driven by Strong IB Performance

Summary:
• 3Q14 net income from strategic business of CHF 1.1 billion, on net revenues of CHF 6.3 billion highlighted by strong Investment Banking net revenues and further momentum in Private Banking & Wealth Management businesses.
• CSG continues to make good progress in winding-down exposures, although legacy issues remain, with a net loss of CHF 90 million in non-strategic units (NSUs) in 3Q14.
• Capital position strengthened 30 basis points (bps) QoQ, with the fully-loaded Basel 3 Common Equity Tier 1 (CET1) at 9.8%.
• 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) 3Q14 financial results as demonstrating the solid performance in strategic businesses, highlighted by strong Investment Banking (IB) net revenues and further momentum in Private Banking & Wealth Management (PB&WM).

IB reported strong pre-tax profit on strategic businesses of CHF 995 million in 3Q14, on net revenues of CHF 3.4 billion, an increase of 24% YoY. Fixed income sales & trading (S&T) net revenue in the Group's strategic businesses posted particularly strong revenues of CHF 2.1 billion in the quarter, driven by emerging markets and securitized products. This helped to offset declining equity S&T revenue YoY, which was impacted by lower client activity and weaker performance in cash equities. CSG’s underwriting and advisory net revenues were strong in 3Q14, following strong equity underwriting activity across APAC and EMEA. DBRS also notes that the Group has a strong advisory and underwriting pipeline, indicating continued momentum.

PB&WM also continues to report net asset inflows on a quarterly basis, with net new assets of CHF 8.8 billion on a strategic basis in 3Q14. Specifically, strong WM inflows from clients in emerging markets, particularly in Asia-Pacific, and Switzerland, combined with solid net asset inflows within Asset Management, in emerging markets, as well as index, hedge fund and credit products, contributed to growth in assets under management to a sizable CHF 1.4 trillion.

The Group continues to make good progress in winding down its non-strategic units (NSUs). In 3Q14, CSG achieved a USD 11 billion of leverage reduction and USD 2 billion of RWA reduction in the Group’s non-strategic IB unit, while in the Group’s non-strategic PB&WM unit, CSG achieved a QoQ leverage reduction of 18%, to CHF 14 billion. The sale of the Group’s domestic private banking business booked in Germany also contributed to the unit recording a pre-tax profit of EUR 71 million in 3Q14. DBRS notes, however, that litigation risk continues to be a burden for the Group, with litigation-related expenses of CHF 227 million contributing to a pre-tax loss of EUR 479 million in the non-strategic IB unit.

CSG strengthened its balance sheet in 3Q14, posting a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio of 9.8% at end-3Q14, a QoQ increase of 30 bps. While this remains at the lower end of the Group’s peer range, DBRS acknowledges that the Group is targeting an above 10% CET1 ratio by end-2014 through earnings retention, RWA reduction and the sale of real asset assets, and has re-confirmed its long-term CET1 target of 11%.

DBRS notes that the Group is now also targeting a fully-loaded Swiss Leverage ratio of 4.5% by end-2015, up from 3.8% at end-3Q14. This is to be accomplished by lowering leverage exposure to CHF 1.05 trillion from CHF 1.19 trillion at end-3Q14, through the reduction of the non-strategic units, balance sheet optimization, and business reductions of CHF 70 billion including several potential large structural reductions. DBRS considers the introduction of this target to be prudent in light of the current regulatory environment.

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 franc (CHF) unless otherwise noted.