TEXT-Fitch affirms Credit Suisse at 'A'; OUTLOOK STABLE
(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed Credit Suisse AG's
Issuer Default Rating at 'A' with a Stable Outlook and Short-term IDR at 'F1'. The agency has also affirmed the bank's Viability Rating (VR) at 'a', Support Rating at '1' and Support Rating Floor (SRF) at 'A'. At the same time, Fitch affirmed the ratings of Credit Suisse's subsidiaries and holding company and of its issues. A full list of rating actions is at the end of this rating action commentary.
The rating actions on Credit Suisse have been taken in conjunction with Fitch's Global Trading and Universal Bank (GTUB) periodic review. Fitch's outlook for the industry is stable. Positive rating drivers include improved liquidity, funding, capitalisation and more streamlined businesses, all partly driven by regulation. Offsetting these positive drivers are substantial earnings pressure, regulatory uncertainty and heightened legal and operational risk.
RATING ACTION RATIONALE The affirmation of Credit Suisse's VR and IDR reflects the bank's operations as a global investment bank and wealth manager with a solid domestic retail and commercial banking franchise. Credit Suisse raised new capital in H212, which together with aggressive reduction of risk-weighted assets (RWA), resulted in stronger capitalisation. Its Fitch core capital ratio and regulatory capital ratios measured under Basel III RWA are now in line with its peers.
Fitch expects the bank to continue to concentrate on its core segments in investment banking, which will continue to be the group's main risk centre. The group has reduced various market risk metrics, and Fitch expects the investment bank's earnings to show less volatility, after Q411 losses in the investment bank that partly reflected its reduction in inventory and risk positions. Nevertheless, the agency considers that investment banking activities give rise to material market and operational risks, which are captured in Credit Suisse's VR.
The affirmation of Credit Suisse's Support Rating and SRF is based on Fitch's view that the probability of support from the Swiss authorities for Credit Suisse, if required, remains extremely likely due to the bank's systemic importance for the Swiss financial sector and the Swiss economy as a whole.
RATING DRIVERS AND SENSITIVITIES - IDRS, VR AND SENIOR DEBT Credit Suisse's IDRs, its Stable Outlook and senior debt rating are driven by its VR, which is based on Credit Suisse's good global wealth management franchise and its significant market share in global investment banking, as well as its retail and commercial banking presence in Switzerland. The VR also reflects Credit Suisse's good track record in risk management, strong liquidity and improved capitalisation following the capital measures announced in July 2012.
Fitch expects Credit Suisse to maintain a significant presence in investment banking, and the agency's view of risk in this industry is a negative rating driver. However, the bank has a good track record in managing the related risks, which along with its strong global wealth management and domestic banking franchises, places the VR in the 'a' category. Fitch views positively the reduced market risk exposure in the investment bank, where Basel III RWA declined by about 38% between end-June 2011 and end-June 2012.
The aggressive RWA reduction resulted in losses in the investment bank in Q411, but Fitch expects revenue volatility in the segment to have fallen as a result. Credit Suisse's VR is sensitive to Fitch's assumptions on the bank's risk appetite in the investment bank and would come under pressure if Credit Suisse materially increased its risk taking in this segment or if it was unable to maintain earnings volatility at a moderate level.
Credit Suisse's VR reflects Fitch's expectation that the bank will maintain strong capital ratios. Swiss regulations will require Credit Suisse to operate with a minimum 10% core capital ratio under Basel III by 2019. In addition, the bank will have to hold 9% of loss-absorbing capital, which can be in the form of contingent convertible instruments.
In July 2012, the bank announced measures to strengthen its capital ratios, including the issuance of CHF3.8bn mandatory convertible notes that will convert into common equity in March 2013. As a result, Credit Suisse estimates a common equity tier 1 (CET1) ratio of 8.6% at end-2012, which places it in line with most of its GTUB peers. The increase in equity will also reduce balance sheet leverage, although it remains some of the highest among its peers. Fitch expects the bank to increasingly manage its balance sheet size, which should result in an improved leverage ratio. The generally good quality of assets and the group's strong funding mitigates the high leverage, although Fitch still considers this a negative rating driver for the bank relative to most of its peers.
In addition to its CET1 capital, the bank has about CHF4.3bn contingent convertible notes, which convert into common equity if the group's CET1 ratio falls below 7%. Fitch considers this buffer positive for the bank's VR as it provides further protection for senior creditors. Failure to reach and maintain strong capital ratios would put pressure on Credit Suisse's VR.
The VR is also based on Credit Suisse's strong global wealth management operations, which provide the bank with a more stable source of earnings, although earnings in the segment are to some extent driven by clients' risk appetite and transaction volumes. With assets under management in the private bank of about CHF989bn at end-June 2012, Credit Suisse is one the world's largest wealth managers. The bank's VR is sensitive to any material and structural changes in the size of its wealth management operations.
Fitch considers Credit Suisse's liquidity strong as it benefits from a large and historically stable customer funding base, and the bank estimates a net stable funding ratio of above 100% at end-June 2012. Liquidity is managed centrally, and Credit Suisse maintains a large pool of liquid assets, partly driven by stringent Swiss regulatory requirements. At end-June 2012, the bank reported CHF146bn of cash, securities accepted under central bank facilities and other liquid securities.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SRF The Support Rating and SRF are sensitive to a change in Fitch's assumptions around the availability of sovereign support for the bank. In this context, Fitch is paying close attention to ongoing policy discussions around bank support and 'bail in'. An upgrade of Credit Suisse's SRF is unlikely given Fitch's expectation of diminishing sovereign support for banks in Switzerland and globally.
Switzerland has made significant progress in implementing specific legislation for the country's two largest banks (Credit Suisse and UBS AG), which should ultimately facilitate bank resolution and will eventually result in declining sovereign support for Credit Suisse. However, Fitch expects that this will be a gradual and lengthy process, and the agency will take corresponding rating actions when and if deemed appropriate.
Credit Suisse's Long-term IDR is at its SRF, but if the SRF was downgraded, the IDRs would only be downgraded if the VR was below its current 'a' level.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Credit Suisse, Credit Suisse Group AG and by various issuing vehicles are all notched down from the VRs of Credit Suisse or Credit Suisse Group AG in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VRs of Credit Suisse or Credit Suisse Group AG.
HOLDING COMPANY RATING DRIVERS AND SENSITIVITIES Credit Suisse Group AG's IDRs and VR are equalised with those of Credit Suisse and reflect its role as the bank holding company and the modest double leverage of 102% at end-2011 at holding company level.
Credit Suisse Group AG's Support Rating and SRF reflect Fitch's view that support from the Swiss authorities for the holding company is possible, but cannot be relied on. As Credit Suisse AG's SRF is 'No Floor', the holding company's Long-term IDR is driven purely by its VR and is therefore primarily sensitive to the same drivers as Credit Suisse's VR.
SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES Credit Suisse International is a UK-based wholly-owned subsidiary of Credit Suisse Group AG, and Credit Suisse (USA) Inc. (CSUSA) is the group's main US-based broker-dealer. Their IDRs are based on support from their parent and are therefore equalised with Credit Suisse's to reflect their core functions within the group as major operating entities in the investment banking business.
Credit Suisse International is incorporated as an unlimited liability company, which underpins Fitch's view that there is an extremely high probability that it would receive support from its parent if needed. In H112, Credit Suisse International restructured its capital base, redeeming subordinated debt placed with its parent with participating shares placed with the parent, thereby improving the quality of its capital.
CSUSA's parent companies (Credit Suisse and Credit Suisse Group AG) in 2007 issued full, unconditional and several guarantees for the firm's outstanding SEC registered debt securities, which in Fitch's opinion demonstrate the role of the subsidiary and the extremely high probability that the firm would be supported if needed.
The rating actions are as follows:
Credit Suisse: Long-term IDR: affirmed at 'A', Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A' Senior unsecured debt (including programme ratings): affirmed at 'A'/'F1' Senior market-linked notes: affirmed at 'Aemr' Subordinated lower Tier 2 notes: affirmed at 'A-' Tier 1 notes and preferred securities: affirmed at 'BBB-' The rating actions have no impact on the ratings of the outstanding covered bonds issued by Credit Suisse Credit Suisse Group AG Long-term IDR: affirmed at 'A', Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt (including programme ratings): affirmed at 'A'/'F1' Senior market-linked notes: affirmed at 'Aemr' Subordinated notes: affirmed at 'A-' Preferred stock (ISIN XS0148995888): affirmed at 'BBB' Preferred stock (ISIN XS0112553291 and JPY30.bn issue): affirmed at 'BBB-' Credit Suisse International: Long-term IDR: affirmed at 'A', Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Senior unsecured debt (including debt issuance and CP programme ratings): affirmed at 'A'/'F1' Dated subordinated notes: affirmed at 'A-' Perpetual subordinated notes: affirmed at 'BBB' Credit Suisse (USA) Inc.: Long-term IDR: affirmed at 'A', Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Senior unsecured debt (including programme ratings): affirmed at 'A' Commercial paper programme: affirmed at 'F1' Subordinated notes: affirmed at 'A-' Credit Suisse NY (branch): Long-term IDR: affirmed at 'A', Outlook Stable Short-term IDR: affirmed at 'F1' Senior unsecured debt (including programme ratings): affirmed at 'A' Commercial paper programme: affirmed at 'F1' Senior market-linked notes: affirmed at 'Aemr' Claudius Limited: Preferred securities: affirmed at 'BB+' Credit Suisse Group (Guernsey) I Limited Tier 2 Contingent Notes: affirmed at 'BBB-' Credit Suisse Group (Guernsey) II Limited Tier 1 Buffer Capital Perpetual Notes: affirmed at 'BB+' Credit Suisse Group (Guernsey) IV Limited Tier 2 Contingent Notes: affirmed at 'BBB-'
The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria (New York Ratings Team)