DBRS Confirms Credit Suisse AG at A, Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Long-Term Debt rating of Credit Suisse Group AG (Credit Suisse or the Group), the top-level holding company, at A (low), and the Issuer Rating and Senior Unsecured Debt & Deposits rating of Credit Suisse AG (the Bank), the main operating subsidiary of the Group, at ‘A’. The trend on all senior ratings is Stable. The Bank’s Intrinsic Assessment (IA) is ‘A’, whilst the support assessment remains SA3. As a result, the Bank’s final ratings are positioned in line with its IA. At the same time, the Bank’s Subordinated Debt rating of A (low) remains Under Review with Negative Implications (URN) as per the action on January 13, 2017: DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications.

Credit Suisse’s ratings and Stable trend reflect the strength of the Group’s franchise, which is underpinned by a leading position in private wealth management globally and an important domestic Swiss business, with strong market shares, combined with its strengthened capital position and solid funding and liquidity profile. The ratings and trend also incorporate the challenges still faced by Credit Suisse in achieving ambitious growth targets while demonstrating consistent earnings generation ability and maintaining a strong risk profile.

DBRS notes that Credit Suisse has made good progress in its restructuring plan, deleveraging its Strategic Resolution Unit (SRU) Risk-Weighted Assets (RWAs) by 39% in 2016 to USD 44.4 billion at end-2016. However, the impact on the Group’s earnings has been significant, with the SRU recording a pre-tax loss of CHF 2.7 billion in 2015, and CHF 5.5 billion in 2016. With the Group targeting an accelerated run-down of SRU, including a 56% decrease in RWAs (excluding Operational Risk) from end-2016 to USD 11 billion in 2019, the drag on earnings is expected to continue over the near-term. In addition, the Group has been affected by a number of significant litigation and conduct charges, including CHF 2.7 billion of net litigation provisions in 2016, relating primarily to the Group’s settlement with the Department of Justice (DoJ) regarding their U.S. residential mortgage-backed (RMBS) activities through 2007. Although the settlement with the DoJ in December 2016 removed one of the most significant conduct-related uncertainties for Credit Suisse, DBRS notes that the Group remains involved in a number of litigation and/or regulatory investigations, which could lead to further charges.

Despite certain deficiencies becoming evident in 2016 with disclosures about the build-up of illiquid inventory positions, the Group has generally maintained a conservative risk profile. Market risk, as measured by regulatory one-day trading value-at-risk (VaR - measured at a 98% confidence interval and excluding methodology changes to better allow comparison with earlier periods), has continued to decline in recent years, averaging CHF 27 million in 4Q16, against a peak of CHF 249 million in 2008. Asset quality has also remained solid in Credit Suisse’s CHF 275.6 billion gross loan portfolio (excluding loans held for sale), with a gross impaired loan ratio of just 0.8% at end-9M16. DBRS does, however, note the recent significant increases in credit volumes within both the Asia Pacific (APAC) and International Wealth Management (IWM) divisions. Although the performance of both portfolios remains strong, with impaired loan ratios of 0.7% and 1.0% for APAC and IWM respectively at end-9M16, the volume of impaired has continued to increase, albeit from low levels, up 75% and 26% respectively YoY to CHF 442 million in IWM and to CHF 289 million in APAC at end-9M16. As a result, DBRS will continue to monitor closely the quality of Credit Suisse’s APAC and IWM loan portfolios, as the Group looks to expand its footprint in the region and other emerging markets, in an effort to meet ambitious profitability targets.

Credit Suisse maintains a solid funding and liquidity profile, with conservative asset/liability management underpinned by a generally stable funding profile that includes a large customer deposit base and longer-term sources of wholesale funding. The Group also maintains a highly liquid balance sheet, as well as a sizable liquidity pool, of CHF 184.8 billion, principally consisting of cash, high grade bonds and liquid securities, which is well placed to cover expected outflows in a stressed scenario.

Credit Suisse strengthened its capital position in 2016, driven principally by RWA reductions. At end-2016, Credit Suisse reported a fully-loaded BIS Basel 3 Common Equity Tier 1 (CET1) ratio of 11.6%, comfortably above the Group’s current fully-loaded regulatory requirement, and a leverage ratio of 3.3%. With internal capital generation expected to be limited over the near-term, however, further progress in executing the accelerated run-down of SRU will be important for the Group. Nevertheless, DBRS notes that the Group looks well-placed to meet certain future requirements, including the Swiss Federal Council’s Too Big To Fail (TBTF) framework, which will be phased in progressively through to 2020. With CHF 30.3 billion of bail-in able debt instruments at end-2016, the Group reported a look-through Swiss capital ratio of 27.5% (11.5% CET1; 4.7% Additional Tier 1 (AT1); and 11.3% bail-in instruments), and a look-through leverage ratio of 7.8% (3.3% CET1; 1.3% AT1; and 3.2% bail-in instruments). This is well in advance of phase-in 2017 requirements, and compares well with the Group’s 2020 requirement, resulting in a manageable estimated funding gap of bail-in debt instruments of CHF 17.3 billion.

Concurrently, DBRS has placed the BBB (high) Subordinated Debt Rating of Credit Suisse Group Finance (Guernsey) Limited Under Review with Negative Implications.

RATING DRIVERS

Upward pressure on the rating could arise if Credit Suisse demonstrates progress in successfully executing on its strategic initiatives, by meeting targets related to cost reductions, pre-tax income and increased capitalisation, whilst maintaining a solid risk profile.

Downward pressure could be driven by any indication that the restructuring task is negatively impacting the overall strength of the Group’s franchise. Downward pressure could also arise if DBRS perceives that Credit Suisse’s risk profile is being negatively impacted by its expansion efforts, particularly in Asia Pacific and other emerging markets, in an effort to meet ambitious profitability targets. The Bank’s Subordinated Debt rating of A (low) remains Under Review with Negative Implications, as per the action on January 13, 2017.

Notes:
All figures are in CHF unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company documents. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant
internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Jack Deegan, Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Global Credit Policy
Initial Rating Date: September 13, 2006
Last Rating Date: March 7, 2017

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