DBRS Downgrades Credit Suisse Group to A (high), Credit Suisse AG to AA (low), Trend Now Stable

DBRS, Inc. (DBRS) has today downgraded its ratings for Credit Suisse Group AG (Credit Suisse or the Group), the top-level holding company, including its Senior Unsecured Long-Term Debt rating to A (high) from AA (low), and Credit Suisse AG (the Bank), the main operating subsidiary of the Group, including its Senior Unsecured Long-Term Debt & Deposit rating to AA (low) from AA and Short-Term Debt rating to R-1 (middle) from R-1 (high). The trend on all ratings has been revised to Stable from Negative. Related subsidiary ratings have also been impacted by this action. The Bank’s intrinsic assessment (IA) has been lowered to A (high) from AA (low). With an SA-2 support assessment reflecting DBRS’s view that Credit Suisse is a systemically important banking organisation (SIB), the Bank’s final ratings are positioned one notch above its IA at AA (low).

The downgrade takes into account a combination of factors, including the longer-term challenges Credit Suisse faces in strategically positioning its Investment Bank (IB), while running off non-strategic exposures, strengthening its regulatory capital levels in an evolving regulatory environment, enhancing risk culture and controls through continued IT investment, and generating more consistent earnings while still appropriately provisioning for ongoing litigation/investigations. When assessing Credit Suisse’s underlying fundamentals and comparing across a global peer group, DBRS views the Bank’s IA as more appropriately placed at the A (high) level.

The trend on the ratings has been revised to Stable reflecting DBRS’s view that the ratings are well-placed at the current level. Supporting the current rating level is the overall strength of the Group’s Private Banking & Wealth Management (PB&WM) franchise, which continues to demonstrate momentum, combined with a generally conservative risk profile, strong funding and ample liquidity. Upward pressure on the ratings is unlikely in the medium-term, but could arise if the Group is successful in executing its strategic plans with regard business initiatives, costs reductions and capital/leverage ratio. Failure to achieve these targets, however could result in further downward pressure on ratings. Additionally, further substantial litigation or reputational issues could also pressure the ratings, especially if DBRS perceived these to be causing damage to the Group’s strong PB&WM franchise.

To date, Credit Suisse has reported weaker regulatory capital levels than a number of peers, as capital was adversely impacted in 2Q14 following the settlement with US authorities and is still being built up through retained earnings and pro-active risk-weighted asset reductions. At end-3Q14, the Group’s fully-loaded core capital ratio was 9.8%, below the Group’s long-term target of 11%. While the 8.5% core capital regulatory requirement for Credit Suisse does not become effective until 2019, DBRS views market participants, especially those with large capital markets businesses, as needing to meet the higher requirement well in advance of the effective date. DBRS also views the leverage ratio as adding a further constraint to the Group, as its fully loaded Swiss leverage ratio of 3.8% currently falls below the Group’s target of 4.5% by end-2015. In order to achieve this target, the Group announced a further CHF 70 billion reduction in leverage exposure through business reductions in 3Q14.

DBRS notes that Credit Suisse remains committed to maintaining a sizable IB given its complementary nature to the PB&WM division. The Group, however, continues to adjust its strategic businesses, focusing on businesses that generate adequate returns on allocated capital, such as credit products, cash equities and prime services. DBRS notes that future restructuring has the potential to constrain the Group’s IB franchise, particularly given the need to improve the leverage ratio through business reductions. DBRS also notes that the IB’s non-strategic exposure continues to drag on overall earnings, with net losses of CHF 2.2 billion in 2013 and CHF 1.1 billion in 9M14, largely driven by outsized litigation reserves.

Credit Suisse’s core Strategic revenues have held up in 9M14, comparing well to 2011-2014 levels. However revenues do remain below 2009/2010 levels, and DBRS expects additional revenue growth to be difficult in the current environment. This adds pressure to achieve expense reductions and improve efficiency. Positively, the Group is on track to achieve targeted expense reductions of CHF 4.5 billion by the end of 2015, with annualized cost savings of CHF 3.6 billion having been achieved through 9M14. DBRS notes that Credit Suisse also has room to adjust its variable compensation expense within the IB, as compensation/net revenue accrual amounted to 44% in 9M14. 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.

Legacy conduct issues, in the form of elevated ligation expenses, have at times overshadowed the Group’s underlying business momentum. Efforts to address legacy issues continue to elevate expenses and DBRS expects this to remain a headwind over the intermediate term. While the payment of a sizeable CHF 2.5 billion charge in 2Q14 allowed Credit Suisse to conclude a material legacy litigation issue, the charge resulted in a quarterly operating loss, a decrease in regulatory capital, and somewhat tarnished the Group’s reputation, especially in light of the details about risk management mis-steps within the core PB&WM franchise, despite no notable impact on the franchise. DBRS does, however, view Credit Suisse’s remaining legal issues as generally far less material than in the past, although settlement costs remain extremely elevated across the sector.

Notes:
All figures in Swiss Francs unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013).These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This credit rating has been issued outside the European Union (EU) and may be used for regulatory purposes by financial institutions in the EU.

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: 19 December 2013

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