DBRS Morningstar Downgrades Credit Suisse AG’s LT Issuer Rating to “A (low)”; Trend Remains Negative

DBRS Ratings Limited (DBRS Morningstar) downgraded the Long-Term Issuer Rating of Credit Suisse AG (the Bank) to ‘A (low)’ and the Long-Term Issuer Rating of Credit Suisse Group AG (Credit Suisse, CSG or the Group), the top-level holding company to BBB (high). The Bank’s and CSG’s R-1 (low) Short-Term Issuer ratings were confirmed. The trend on the Long-Term and Short-Term ratings is Negative. The Intrinsic Assessment (IA) for the Bank is ‘A (low)’, 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 downgrade of Credit Suisse AG’s Long-Term ratings to A (low) takes into account the challenges CSG is facing in turning around its franchise and restoring confidence. The Group is embarking on a full overhaul of the Investment Banking businesses, with the creation of a Capital Release Unit and the carve out of a separate investment banking entity, CS First Boston, as well as a significant reduction in full time employees, all of which entails meaningful execution risk.

The downgrade also reflects DBRS Morningstar’s view that the reputational and franchise impact of recurrent risk management shortcomings have materialised into lower revenues and business volumes. Uncertainty over the Group’s direction has translated into lower Assets under Management, net new assets outflows in the last two quarters, senior employee departures, as well as recent deposit outflows. Given the currently weak capacity to generate earnings, the Group’s financial flexibility has been significantly reduced.

The Negative trend reflects the fact that the planned capital raise needs to be successfully completed to execute on the restructuring plan and restore confidence, and that earnings will likely continue to be weak for the foreseeable future. DBRS Morningstar considers cutting costs is crucial for CSG, and the difficulties in carrying out the costs cuts whilst maintaining revenue momentum are also a key consideration for the Negative trend.

The ratings remain underpinned by CSG’s historically strong global franchise in private banking and wealth management, and sound asset quality reflective of its client base.

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 in the short-term. However, the trend could return to Stable if the Group demonstrates it can stabilise the franchise while carrying out its restructuring.

A downgrade of the Long-Term ratings would occur if the franchise weakens further, profitability is not restored and/or capital levels significantly weaken. It would also occur if the planned risk management/reduction actions are not effective and/or additional significant risk management failures arise.

RATING RATIONALE

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

CSG is a global financial institution positioned as a leading wealth manager with specialist investment banking and asset management capabilities. CSG also has a strong presence in Switzerland as the second largest banking group.

The Group presented a strategy update for the next three years on October 27, 2022. CSG’s updated plan is to significantly de-risk the balance-sheet, notably with the creation of a Capital Release Unit (CRU), to which it will allocate non-strategic businesses with low returns (including the sale of Securitized Products). The Group’s Investment Bank (IB) will be more focused on business that has a strong linkage or connectivity with its core businesses of Wealth Management, Asset Management and the Swiss Bank. The new IB will primarily comprise the trading business under Markets and a new separate capital markets bank, CS First Boston, which will include the capital market businesses of equity and debt underwriting as well as advisory business. The Group had already announced the exit of the majority of Investment Banking prime services in its previous strategic plan.

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

CSG’s results have been affected by write-downs and major litigations costs, particularly in 2021, and largely recorded in its Investment Bank (IB). In Q3 2022, the Group reported another significant net loss attributable to shareholders of CHF 4 billion, following a net loss in Q2 2022. The Q3 loss included a significant write down of deferred tax assets of CHF 3.7 billion ahead of the restructuring process, however, CSG’s net income before tax was also down reflecting a decline in revenues in all business lines. As a result, CSG reported a loss before taxes of CHF 0.3 billion in Q3 2022 (and a net loss before taxes of approximately CHF 2 billion in 9M 2022). The main drivers of the loss were much lower commissions and fees due to lower client activity, as well as lower trading revenues due to a drop in capital market revenues. In 9M 2022, total revenues were down 35% Year-on-Year (YoY), largely driven by lower fees and commissions (down 31% YoY) and trading revenues (down 95% YoY). Meanwhile total net interest income also declined (down -14% YoY).

We expect capital market conditions will remain challenging, and, as a result, reducing costs is crucial for CSG, and the challenge in implementing this is a key consideration for the Negative trend. We note the Group expects to incur some large upfront costs through the 2022-2025 period. This includes restructuring charges, software and real estate impairments of an additional CHF 2.9 billion (CHF 1.6 billion in 2023 and CHF 1.0 billion in 2024). At the same time, management expects these costs will be offset by planned cost savings of around CHF 2.5 billion by 2025.

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

The Group has s strong footprint in Switzerland and extensive wealth management activities with a good asset quality profile, however, operational risks have been dragging on for a number of years, including significant risk management failures (such as Archegos), which indicate a historical high risk appetite within the IB. While the new management is actively addressing these issues, DBRS Morningstar considers that the Group’s new strategic plan is aggressive but needed. It nonetheless entails high execution risks. In addition, the challenging economic and geopolitical backdrop will make it more difficult to wind down non-core assets.

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

CSG’s funding and liquidity position is underpinned by a large deposit base, and diversified long-term funding, but has recently suffered from reputation issues. In Q3 2022, customer deposits decreased to CHF 371 billion, down 5% from CHF 390 billion at end-Q2 2022 (and also below CHF 393 billion at end-2021). Deposit outflows were exacerbated in the first two weeks of October 2022, following negative media coverage. CSG experienced higher-than-usual cash deposit withdrawals and non-renewal of maturing time deposits. Outflows have now stabilised. The Group’s net loan portfolio was CHF 282 billion at end-Q3 2022. Nevertheless, the deposit outflows led to some liquidity buffers being partially utilised at both group and legal entity level. While CSG fell below certain legal entity-level regulatory requirements, the Group remained above their LCR and NSFR requirements at all times. The Group’s average daily LCR in October 2022 was 154%, whilst recording a strong average LCR of 192% and an NSFR of 136% at end-September 2022.

Capitalisation Combined Building Block (BB) Assessment: Moderate

CSG’s capital levels are a key consideration for CSG’s ratings. At end-Q3 2022, the Group recorded a CET1 ratio of 12.6%, down 90 bps from 13.5% at Q2 2022. The Quarter-on-Quarter decline was attributable to the Group’s net loss attributable to shareholders, alongside a regulatory adjustment of DTAs (-48 bps). The Group anticipates a pro-forma CET1 ratio of 14.0% following the proposed capital raise measures, and a pro-forma T1 leverage ratio of 6.5%.

During the strategic transformation, CSG aims to maintain a CET1 ratio above 13%, and above 13.5% post transformation (and pre-Basel III) – well above minimum capital requirements set by FINMA of 9.3% for CET1, however any significant reduction in capital during the transformation plan would likely negatively affect market confidence. The Total Swiss capital requirements amount to 25.0% where the Other Going Capital Requirement includes the FINMA Pillar 2 capital add-on of USD 2.0 billion relating to the supply chain finance funds matter. CSG’s TLAC is 35.5% as of end-Q3 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/404829

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

DBRS Morningstar views Social and Governance risk factors as significant rating factors for the Group’s ratings. This is reflected in the Franchise and Risk building blocks, and is largely associated with product governance issues, business ethics, and repeated failures in risk management evidenced by weak controls and monitoring of risks in the Archegos and supply chain finance funds but also by tax evasion issues and money laundering cases. CSG has had several significant top management changes following serious operational risk issues. In July 2022, a new CEO was appointed (with the prior CEO in the role for only two years) while a new chairman was appointed on January 2022. To fully restore confidence in the Group, DBRS Morningstar continues to consider that a period of management stability and track record is needed.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022)

Notes:
All figures are in CHF unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022) https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations
In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

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 Q1-Q4 2021 & Q2-Q3 2022 Quarterly Earnings, CSG Q3 2022 Strategy Update. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/404828

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

Lead Analyst: Vitaline Yeterian, 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, 2022

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.