DBRS Morningstar Confirms Credit Suisse AG’s “A” LT Issuer Rating; Trend Remains Negative

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 remains Negative and on the Short-Term ratings is 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 confirmation of Credit Suisse AG’s Long-Term ratings of A takes into account that CSG’s franchise has demonstrated resilience and has so far contained the reputational damage following significant risk management failures related to Archegos and the supply chain finance funds. It also reflects DBRS Morningstar’s view that the Group’s capital levels remain sound and that the Group has taken actions to improve risk management, including several management changes and is de-risking through the exit of some Investment banking business. However, the Negative trend also reflects that the full reputational and franchise impact of risk management shortcomings could be more visible in coming quarters, potentially through lower revenues and business volumes. This, together with expected higher litigation costs, has the potential to reduce the Group’s financial flexibility and capital position.

The ratings are underpinned by CSG’s strong global franchise in private banking and wealth management, and meaningful investment banking operations, as well as the Group’s sound funding and liquidity position, and sound asset quality.

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 risk management failures.

A downgrade of the Long-Term ratings would arise if the franchise is perceived to be weakening through significantly lower business and earnings in coming quarters, and if this is accompanied by a meaningful impact on the Group's capital. It would also arise if risk management actions are not implemented and/or additional significant risk management failures occur.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good

CSG is one of the largest international financial institutions globally. It has meaningful wealth management and investment banking franchises and is the second largest banking group in Switzerland. CSG has had several significant top management changes in the last 24 months with the CEO now in the role for two years and a new chairman appointed on January 2022. DBRS Morningstar considers that a period of management stability and track record is needed to fully restore confidence in the Group. Following the Archegos mismanagement, the Group announced the exit of the majority of Investment Banking prime services. The Group presented a new strategic plan in November 2021 for the 2022-2024 period, focused on improving risk management, strengthening businesses, simplifying the organisational structure and investing for growth, particularly in Wealth Management where the Group sees significant growth opportunities.

Earnings Combined Building Block (BB) Assessment: Moderate/Weak

In 2021, CSG’s resilient revenue generation was able to absorb a CHF 4.3 billion write down on its exposure to Archegos. However, CSG’s results were also negatively impacted by a CHF 1.2 billion of major litigation costs and a CHF 1.6 billion goodwill impairment related to the acquisition of Donaldson, Lufkin & Jenrette (DLJ) in 2000, largely recorded in its Investment Bank (IB). As a result, the Group reported a net attributable loss of CHF 1.6 billion in 2021, compared to a net attributable profit of CHF 2.7 billion in 2020 and CHF 3.4 billion in 2019. Adjusted Income Before Taxes (IBT) (when excluding the Archegos credit costs and other significant items), was resilient and totalled CHF 6.6 billion in 2021, up from CHF 4.4 billion in 2020. Adjusted net revenues were supported by strong performance of the Investment bank and resilient wealth management revenues. The Group also made good progress on the cost side, and adjusted operating expenses (excluding major litigation, goodwill impairment and restructuring expenses) were down around 3.2% in 2021 YoY, largely reflecting lower compensation.

Risk Combined Building Block (BB) Assessment: Good

CSG had significant risk management failures in the past year, which translated into a quarter of losses and flagged an urgent need to improve risk management, culture and controls. In addition, the Group has a number of outstanding litigation cases in relation to legacy issues, including some associated with anti-money laundering issues and conduct issues. After the Archegos and supply chain finance funds issues, the Group appears to be taking measures to improve risk management, and has conducted a full review of the Group’s risk appetite framework. Among the measures, it has aligned incentives with the risk return process and has made significant management changes around risk and compliance. A key consideration for the Negative trend is that management needs to demonstrate over coming quarters that is able to resolve risk management weaknesses and implement a sound risk management culture throughout the entire organisation.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/ Strong

CSG has a solid funding and liquidity position underpinned by a large and stable deposit base, diversified long-term funding and high level of liquid assets. At end-2021 customer deposits totalled CHF 392.8 billion, flat YoY and fund the Group’s CHF 292 billion net loan portfolio. Despite a challenging 2021, CSG access to market funding remained sound through a variety of short- and long-term debt. During 2021,the Group issued CHF 21 billion of a variety of instruments, including senior holdco and opco debt and covered bonds. The Liquidity Coverage Ratio (LCR) was strong at 203% with CHF 227.2 billion of HQLA at end-2021.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

CSG’s sound regulatory capital levels is a key consideration supporting CSG’s ratings. The impact on capital from the Archegos write down was significant but manageable as the Group raised CHF 1.7 billion of capital through the issuance of Mandatory Convertible Notes in April 2021, which converted into CET1 capital in Q4 2021. CSG’s fully-loaded BIS Basel 3 Common Equity Tier 1 (CET1) was 14.4% at end-2021, up from 12.9% at end-2020. The improvement in the ratio reflected both the capital raise and a 2.7% YoY risk weighted asset (RWA) reduction, partly driven by de-risking and the exit of some businesses, including the majority of the prime brokerage services business.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/395190

ESG CONSIDERATIONS

DBRS Morningstar views Governance risk factor as a significant rating factor for the Group’s ratings. This is reflected in the Franchise and Risk building blocks, and is largely associated with repeated failures in risk management, controls and monitoring of risks largely evidenced in the Archegos and supply chain finance funds shortcomings. Although management has taken steps to improve risk management after these failures, the Governance risk factor remains an important consideration for the Negative trend.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in CHF unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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 (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The sources of information used for this rating include Morningstar Inc. and Company Documents, CSG FY 2021 Annual Report, CSG FY 2021 Presentation, CSG FY 2021 Press Release, CSG and CSG Q1-Q4 2021 Quarterly Earnings. 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/395189

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: April 12, 2021

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