DBRS: Credit Suisse Reports Solid 4Q14 Results Driven by Strong IB

Summary:
• 4Q14 net income from strategic businesses of CHF 1.2 billion on net revenues of CHF 6.0 billion highlighted by strong Investment Banking net revenues.
• Headwinds to future earnings present following SNB’s decision to eliminate the CHF/EUR cap, although CSG expect these to be offset by various mitigating actions: no impact recorded in 4Q14 results.
• Capital position strengthened by 40 bps QoQ, with the fully-loaded Basel 3 CET1 at 10.2%.
• DBRS rates Credit Suisse Group AG Senior Unsecured Long-Term Debt at A (high) and Credit Suisse AG Senior Unsecured Long-Term Debt & Deposit at AA (low); all with Stable trend.

DBRS, Inc. (DBRS) considers Credit Suisse Group AG’s (CSG or the Group) 4Q14 financial results as demonstrating continued solid performance in its strategic businesses, highlighted by strong Investment Banking (IB) net revenues.

IB reported strong pre-tax profit on strategic businesses of CHF 687 million in 4Q14, on net revenues of CHF 2.9 billion excluding funding value adjustments (FVA) charge of CHF 108 million, an increase of 43% year-on-year (YoY). Equity sales & trading (S&T) net revenue in the Group's strategic businesses posted particularly strong revenues of CHF 1.2 billion excluding FVA in the quarter, reflecting strong performance in Asia, the more favourable trading environment and increased client activity. The Group’s strategic fixed income S&T net revenue continues to be challenged by the evolving operating environment, but results were solid at CHF 948 million excluding FVA, up 19% YoY but down 41% quarter-on-quarter (QoQ). Strong S&T revenues, along with solid M&A revenues, helped to offset weaker underwriting performance in the quarter, following increased market uncertainty. DBRS does, however, note that the Group has a strong advisory and underwriting pipeline, indicating continued momentum.

Private Banking & Wealth Management (PB&WM) reported net asset outflows from strategic business of CHF 200 million in 4Q14, driven by CHF 9.2 billion of outflows resulting from the change of management of funds from Hedging-Griffo to a new venture in Brazil, Verde Asset Management, in which Credit Suisse has a significant investment. DBRS does, however, note that strong Corporate & Institutional Clients and WM inflows from emerging markets, particularly EMEA and Asia-Pacific, combined with FX movements, contributed to further growth in assets under management to a sizeable CHF 1.38 trillion at end-4Q14.

The Group faces some headwinds following the Swiss National Bank’s (SNB) decision to remove the CHF cap. The Group estimates the net adverse impact to be 6% of pre-tax income, based on 2014 earnings. This impact, however, declines to 3% following initial mitigating actions in 2015, which include a CHF 75 million per annum reduction in future deferred compensation and expected higher client FX transactional volumes. The adverse impact is then expected to be more than offset by the implementation of CHF 200 million of incremental cost savings by end-2017, and the CHF 950 million of remaining costs savings by end-2015, from the 2011 cost plan. Whilst undoubtedly challenged by the impact of SNB’s decision, DBRS acknowledges the Group’s track record in pursuing cost savings targets, and so would expect the latest measures to be attainable.

CSG continued to strengthen its balance sheet in 4Q14, with further risk weighted assets (RWA) and leverage exposure reductions in the Investment Bank (IB). As a result, at end-4Q14, the Group recorded a fully-loaded Basel III Common Equity Tier 1 (CET1) ratio of 10.2%, a 40 basis points (bps) increase QoQ and ahead of the Group’s year-end 2014 target, and a fully-loaded Swiss Leverage ratio of 3.9%, an increase of 10 bps. Most notably, the Group revised its end-2015 leverage exposure target to CHF 930-950 billion, down from CHF 1.05 trillion announced in 3Q14, denoting a further CHF 50-70 billion of reductions. This reduction is to be achieved in part by business and client optimisation in the IB, in addition to the planned reductions in the non-strategic units.

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

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