DBRS Confirms Credit Suisse AG at A, Trend Stable

DBRS, Inc. (DBRS) confirmed the ratings of Credit Suisse Group AG (Credit Suisse or the Group), the top-level holding company, including its Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Credit Suisse AG (the Bank). The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its support assessment remains SA1. The Group’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

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, its strong funding and liquidity profile, its solid capital position, and the improving underlying profitability. DBRS views positively the substantial progress that Credit Suisse has made in its restructuring plans, and incorporates within the current ratings the expectation that the Group will continue to have success in executing on its strategic initiatives. The ratings and trend also incorporate the challenges still faced by Credit Suisse in growing its franchise while demonstrating consistent earnings generation ability and cost control and maintaining a strong risk profile.

Key aspects of the Group’s restructuring include the reduction of operating expenses, the run-down of non-core assets, and increased capitalization. The Group was successful in reducing its operating expenses and significantly improving its pre-tax profitability in 2017. In full year 2017, the Group reported a profit before taxes of CHF 1.8 billion, which is much improved when compared to the annual pre-tax losses booked in 2015 and 2016. Credit Suisse has also made good progress with the wind-down of the Strategic Resolution Unit (SRU), the segment which houses non-core assets, and this remains on track for completion at end-2018. SRU’s risk weighted assets (RWAs) were CHF 33.6 billion at end-2017, down a notable 26% year-on-year (YoY) and down 54% since 2015. Furthermore, Credit Suisse increased capital through a CHF 4 billion rights offering in 2017, boosting capital to mid-peer range, and providing a comfortable cushion over regulatory minimums.

Revenues in 2017 were relatively flat YoY, supported by the diversification of the franchise across products and geographies. Credit Suisse reported revenue growth in International Wealth Management (IWM) and Investment Banking & Capital Markets (IB&CM), where revenues increased 9% YoY in each segment, offsetting declines in the Swiss Universal Bank (SUB, -6% YoY) and Asia Pacific (APAC, -3% YoY). Credit Suisse’s substantial assets under management of CHF 1.4 trillion, including net new assets of CHF 38 billion in 2017, are also supportive of overall revenues. Earnings improvement was largely driven by an improved expense base, as the Group is making progress towards its cost saving targets, having achieved savings of CHF 3.2 billion from 2015 through 2017 and is on track to achieve its target of a cost base below CHF 17 billion by 2018.

Credit Suisse’s credit quality is strong, given very low levels of impaired loans and improving risk systems and processes. DBRS sees Credit Suisse as effectively reducing non-core risk through its restructuring progress, evidenced through the significant run-down of the SRU. The Group’s gross impaired loan ratio was just 0.8% at end-3Q17 in its CHF 276.9 billion gross loan portfolio. With a significant increase in credit volumes in APAC and IWM, DBRS expects that there could be some credit deterioration associated with these portfolios, though performance of both portfolios is still very strong with an impaired loan ratio of only 0.3% and 1.0%, respectively, at end-3Q17. Market risk remains at historical lows, and was CHF 26 million in 4Q17, substantially reduced from a peak of CHF 249 million in 2008.

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. The Group’s large deposit base supports its funding profile, though DBRS remains cautious that a significant balance of these deposits are sourced from ultra-high net worth and high net worth individuals. These wealth management customers could behave differently in a time of stress versus retail customers, whose deposits tend to be stickier. The Group also maintains a highly liquid balance sheet, with high quality liquid assets of CHF 166 billion, principally consisting of cash, high grade bonds and liquid securities. Credit Suisse reported an average Liquidity Coverage Ratio (LCR) for 3Q17 of 181%, providing significant liquidity coverage over the required minimum.

Credit Suisse’s capital position is solid. At end-4Q17, the Group reported a fully-loaded Swiss SRB Basel 3 Common Equity Tier 1 (CET1) ratio of 12.8%, comfortably above its CET1 target range of 11-12%, and well above regulatory minimums. Additionally, Credit Suisse reported a solid look-through Tier 1 leverage ratio of 5.2%. DBRS notes that the Group’s capital generation ability is fairly limited given the Group’s still challenging earnings capacity. DBRS does, however, see the Group as well-placed to meet future regulatory requirements, including the Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis and Review (CCAR) process and Swiss Federal Council’s Too Big To Fail (TBTF) framework, which will be phased in progressively through to 2020.

RATING DRIVERS
Upward pressure on the rating is likely if Credit Suisse continues to demonstrate progress in successfully executing on its strategic initiatives, by improving its profitability and capitalisation and meeting targets related to cost reductions, while maintaining a strong risk profile.

While DBRS sees downward rating action as unlikely, any evidence that Credit Suisse’s risk profile is being negatively impacted by its expansion efforts, in an effort to meet ambitious profitability targets, would add negative rating pressure.

The Grid Summary Grades for Credit Suisse are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Good.

Notes:
All figures are in CHF unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The primary 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 rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski, Senior Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Senior Vice President, Global FIG
Initial Rating Date: September 13, 2006
Last Rating Date: July 14, 2017

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

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