DBRS Morningstar Revises Trend on Credit Suisse AG’s LT Ratings to Negative; Confirms “A” LT Issuer Rating

DBRS Ratings Limited (DBRS Morningstar) confirmed the Long-Term Issuer Rating of Credit Suisse AG (the Bank) at ‘A’ and the Long-Term Issuer Rating of Credit Suisse Group AG (Credit Suisse, CSG or the Group), the top-level holding company at A (low). The Bank’s and CSG’s R-1 (low) Short-Term Issuer ratings were also confirmed. The trend on the long-term ratings has been revised to Negative from Stable. The trend on the Short-Term ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, and the Support Assessment is SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS

The revision of the Long-Term ratings trend to Negative from Stable reflects DBRS Morningstar concerns over CSG’s risk management, including counterparty risk concentrations, following the disclosure of a substantial write-down in relation to a single counterparty exposure. In addition, DBRS Morningstar considers that reputation and litigation risks have increased after the Group decided to liquidate some supply chain funds that were tied to a company that filed for creditor protection in March 2021. In DBRS Morningstar’s view, these events and other risk management failures in the recent past point to a pattern of risk deficiencies and could result in higher litigation costs, putting additional pressure on the Group’s earnings and franchise. These events raise significant questions regarding the Group’s management ability to maintain an adequate risk-return appetite within the different businesses, particularly in the investment bank, where the financial impact of missteps could be sizeable and materially affect the Group’s financial position. The Negative trend also takes into consideration that although CSG is taking steps to address these risk management weaknesses, DBRS Morningstar has limited tolerance for further risk slippages at this rating level.

The confirmation of the Long-Term ratings continues to reflect CSG’s strong global franchise in private banking and wealth management and meaningful investment banking operations, as well as its sound funding and liquidity position and sound asset quality metrics. The ratings also take into account that even though the Group is expected to report a significant loss in Q1 2021 due to the write down, the impact on capital levels is expected to be manageable.
CSG’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company.

RATING DRIVERS

An upgrade of the Long-Term ratings is unlikely given the Negative trend. However, the trend could return to Stable if the Group demonstrates limited franchise and financial impact from the recent risk management shortcomings.

A downgrade of the Long-Term ratings would arise if additional risk management failures become apparent or if the knock-on effect from current risk management failures translates into a significant reputational or litigation impact on the Group’s franchise, earnings or capital position.

RATING RATIONALE

CSG is one of the largest international financial institutions globally. It has meaningful wealth management and investment banking franchises and it is the second largest banking group in Switzerland. On April 6, 2021, the Group announced that it expects to report a net loss of around CHF 900 million in Q1 2021 driven by a CHF 4.4 billion write down of its exposure to a US hedge fund that failed to meet margin calls. In addition, in March 2021 the Group announced the liquidation of four supply chain finance funds that were exposed to assets originated and structured by Greensill Capital UK Ltd (Greensill), a supply chain financing company based in the UK that filed for credit protection. In addition to the funds, the Group provided a USD 140 million loan to Greensill, of which USD 90 million remains outstanding. Following these events, the Group announced some senior management changes, including the appointment of a new Investment Bank CEO, and a new interim Group Head of Compliance and a new interim Group Risk Officer along with the creation of a separate asset management division, previously managed under the International Wealth Management Division.

CGS has a track record of certain risk shortcomings, some of which have translated into significant fines and litigation costs, with some cases still outstanding. Whilst current risk shortcomings seem to have had a manageable financial and capital impact in Q1 2021 results, they likely evidence deficiencies in the Group’s risk management. DBRS Morningstar highlights the importance for CSG’s credit rating of maintaining adequate controls surrounding concentration risk, particularly given it operates in investment banking business lines which can be highly profitable, but also encompass significant valuation risks and be subject to high volatility. In addition, DBRS Morningstar notes that the reputational consequences of these events could continue to evolve over the medium to long-term and have a significant impact.

DBRS Morningstar considers CSG has a solid funding profile, which is underpinned by a large and stable deposit base, diversified long-term funding and a high level of liquid assets. The Group has announced that it expects to report High Quality Liquid Assets (HQLA) in excess of USD 200 million and the Liquidity Coverage Ratio (LCR) is expected to exceed 200% at end-Q1 2021.

In DBRS Morningstar’s view the impact of the write-down is manageable from a capital perspective, as the losses are likely to be absorbed by the Group’s solid earnings generation. CSG expects the CET1 ratio to be at least 12% at end-Q1 2021, although down from 12.9% at end-2020, largely reflecting the net loss in the quarter. This is well above minimum capital requirements set by FINMA, the Swiss regulator, although the Group has disclosed that it has been required by FINMA to hold additional capital in the form of Pillar 2 buffer.

ESG CONSIDERATIONS

DBRS Morningstar views Corporate Governance as a material rating factor for the Group’s ratings. This is reflected in the Risk building block and is largely associated with repeated failures in risk management, controls and monitoring of risks in some key business lines, as evidenced in the significant financial impact in Q1 2021 from the US hedge fund exposure.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
The Grid Summary Grades for Credit Suisse are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

Notes:
All figures are in CHF unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020).
https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021)
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, Coalition Data, Dealogic, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/376573

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global FIG
Initial Rating Date: September 13, 2006
Last Rating Date: March 1, 2021

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