DBRS Morningstar Takes Rating Actions on Credit Suisse Following Sale to UBS

DBRS Ratings Limited (DBRS Morningstar) has today taken certain rating actions on Credit Suisse AG (the Bank) and Credit Suisse Group AG (Credit Suisse, CSG or the Group), the top-level holding company following the announcement of the acquisition of Credit Suisse by UBS. DBRS Morningstar has downgraded the Long-Term Issuer Rating of the Bank and the Group to Selective Default from BBB Negative trend and BBB (low) Negative trend respectively. DBRS Morningstar now applies a SA1 support designation to Credit Suisse Group AG. As a result, DBRS Morningstar has upgraded Credit Suisse (the Bank and the Group)’s remaining debt obligations, including Credit Suisse AG Senior Unsecured Long-Term Debt & Deposit rating to AA (low) from BBB, its Short-Term Debt & Deposit rating to R-1 (middle) from R-2 (high). These ratings are Under Review with Negative implications, in line with UBS’s ratings.

See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS

Today’s rating action follows the announcement of the acquisition of Credit Suisse by UBS further to a crisis of confidence in Credit Suisse which led the Swiss authorities to coordinate negotiations between UBS and Credit Suisse. On March 19, 2023, UBS announced it will acquire Credit Suisse in full following close coordination with the Swiss Financial Markert Authority (FINMA), the Swiss Confederation and the Swiss National Bank (SNB). Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, for a total of CHF 3 billion under the terms of the all-share transaction. The extraordinary government support provided as part of the transaction triggers a complete write-down to zero of the nominal value of all Additional Tier 1 (AT1) instruments of Credit Suisse of around CHF 15.8 billion, and therefore lead to a rise in core capital.

Following the write down of the AT1 instruments (not rated by DBRS Morningstar), DBRS Morningstar has downgraded the Long-Term Issuer Rating of Credit Suisse AG and the Long-Term Issuer Rating of Credit Suisse Group AG, the top-level holding company, to Selective Default from BBB Negative trend and BBB (low) Negative trend respectively. The Selective Default reflects that Credit Suisse has failed to satisfy a financial obligation on AT1 instruments and that DBRS Morningstar views this as being 'Selective’ as DBRS Morningstar expects Credit Suisse to continue to meet in a timely manner other obligations on other securities and/ or classes of securities.

The Swiss government has exercised its emergency powers to facilitate a swift execution of this merger without the necessity for shareholder approval, and therefore DBRS Morningstar considers the transaction will go ahead. As a result, DBRS Morningstar now applies a SA1 support designation to Credit Suisse to reflect DBRS Morningstar’s expectation of strong and predictable support from the Parent. DBRS Morningstar has consequently withdrawn Credit Suisse’s separate Intrinsic Assessment (IA).

At the same time, DBRS Morningstar has upgraded Credit Suisse (the Bank and the Group)’s remaining debt obligations, including Credit Suisse AG Senior Unsecured Long-Term Debt & Deposit rating to AA (low) from BBB, and its Short-Term Debt & Deposit rating to R-1 (middle) from R-2 (high). These ratings are Under Review with Negative implications, in line with UBS’s ratings.

RATING DRIVERS

An upgrade would likely be linked to an improvement in UBS’s long-term debt ratings. Alternatively, a downgrade of UBS’s ratings would also likely negatively impact Credit Suisse’s ratings.

Any indication of a reduction of support from the Parent could impact DBRS’s support assessment, and potentially have a negative impact on Credit Suisse’s ratings.

RATING RATIONALE

UBS is taking on Credit Suisse’s strong global franchise in private banking and wealth management, as well as Credit Suisse‘s dominant presence in Switzerland previously as the second largest banking group.

Credit Suisse’s earnings have been affected by a tarnished reputation weakening the franchise and business momentum. With UBS stepping in, DBRS Morningstar expects these issues to be resolved in due course. Meanwhile, Credit Suisse's credit quality is likely to remain supported by a low level of impaired loans reflective of the bank’s strong footprint in Switzerland and Wealth Management activities demonstrating good asset quality metrics.
In terms of funding and liquidity, the Swiss National Bank is granting Credit Suisse very significant access to long term secured liquidity facility, which protects UBS from market uncertainty and support the execution of the integration of Credit Suisse into UBS.

CSG’s fully-loaded BIS Basel 3 Common Equity Tier 1 (CET1) was 14.1% at end-FY22, up from 12.6% at end-Q3 2022. The QOQ improvement in the CET1 ratio mainly reflected the share issuance made in Q4 2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors

DBRS Morningstar views Business Ethics and Corporate Governance as Relevant rating factors for UBS’ ratings.

DBRS Morningstar notes UBS is taking on Credit Suisse’s liabilities/outstanding litigations but that they have been reportedly adequately reserved for. At present, there are two major outstanding cases for UBS: (i) the French tax case and (ii) the RMBS case in the US. (i) In February 2019, a French court found the Group guilty of unlawful solicitation of clients on French territory and aggravated laundering of the proceeds of tax fraud. The Group has appealed the case twice. The fine and confiscation imposed by the Court of Appeal are suspended during the appeal. At end-2022, The Group has provisioned EUR 1.1 billion (up from EUR 450 million initially) for this case. (ii) The second one is related to legacy RMBS in the US. In November 2018, the US Department of Justice filed a civil complaint relating to the issuance, underwriting and sale of 40 RMBS transactions in 2006 and 2007. Our expectation is that the final economic and reputational impact of these cases will be manageable for the Group.

There were no Environmental or Social 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 (17 May 2022)

Notes:
All figures are in CHF unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). 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 (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, CSG FY 2022 Annual Report, CSG FY 2022 Presentation, CSG FY 2022 Press Release, CSG Q1-Q4 2022 Quarterly Earnings, CSG Q3 2022 Strategy Update, Swiss Financial Market Supervisory Authority (FINMA): “FINMA approves merger of UBS and Credit Suisse”, SNB: “Swiss National Bank provides substantial liquidity assistance to support UBS takeover of Credit Suisse”, The Swiss Federal council: “Safeguarding financial market stability: Federal Council welcomes and supports UBS takeover of Credit Suisse”. 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.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. DBRS Morningstar reviews 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/411460

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: March 16, 2023

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