TEXT - Fitch says Credit Suisse Q4 results ratings neutral
(The following statement was released by the rating agency) Feb 8 - Fitch Ratings says that Credit Suisse AG's ('A'/Stable/'a') Q412 results are ratings neutral. During the quarter, Credit Suisse made further progress in bringing its capitalisation and leverage in line with peers and continued to improve profitability in those investment banking (IB) activities where the bank believes it is best positioned in terms of market share and Basel III capital efficiency. In Fitch's view, achieving its medium-term performance targets will depend to a large extent on successfully implementing additional announced cost-cutting measures and minimising losses in its wind-down legacy IB portfolio. Credit Suisse reported pre-tax profit of CHF596m in Q412 excluding non-controlling interests without significant economic interest. Its underlying pre-tax profit, adjusted for CHF376m own credit charges, CHF285m restructuring costs and a CHF84m net loss on various non-core asset disposals, remained broadly unchanged quarter-on-quarter at CHF1,173m (Q312: CHF1,203m). Qoq operating revenue was stable in its new private banking & wealth management segment (PBWM) but markedly lower in its IB. Underlying profitability was supported by a lower operating cost base, notably in IB. Credit Suisse's IB showed a mixed performance in Q412. Revenues in fixed income sales and trading (FICC) fell by around 38% qoq, largely as a result of higher losses in the bank's wind-down portfolio (CHF130 for the quarter) and seasonality effects but also due to lower risk-weighted assets (RWA) utilisation (FICC RWA were USD122bn at end-Q412, down from USD176bn at end-Q411). As a result, fixed income returns on Basel III RWA improved to 1.1% in Q412 from 0.7% in Q112. Credit Suisse benefited from its good franchise and good market conditions in securitised products and credit, which together generated 63% of fixed income trading revenue in USD terms in FY12. Revenue from equity sales and trading remained stable (around one-third of IB revenue) with well-performing prime services and cash equities compensating for underperforming fund-linked products and convertibles. Debt and equity underwriting and advisory revenue (also around one-third of IB revenue) improved qoq largely due to a good performance in debt underwriting. Continued cost-cutting measures in IB in Q412 were insufficient to compensate for the fall in revenue and the IB cost/income ratio worsened to 89%, significantly above IB's 2015 target of 70%. To improve IB's performance, management intends to reduce the division's cost run-rate by a further CHF500m by 2015 with further IB-related cost savings in shared services and infrastructure (CHF1.25bn in total, around two-thirds relating to IB). According to management, the segment's return on Basel III normalised allocated capital (8% in Q412, 14% for FY12 if losses on the wind-down portfolio are excluded) should be strengthened by improving the profitability of businesses where Credit Suisse has a meaningful market share but currently an unsatisfactory return on Basel III RWA, such as rates, equity derivatives and advisory. Credit Suisse's wealth (WM) and asset management (AM) businesses, now combined in a new division, performed well in Q412 with net new asset (NNA) inflows in emerging markets and from ultra-high-net-worth individuals balancing outflows from western European off-shore clients. The gross margin in WM remained stable at 110bps helped by performance fees and providing a more resilient end to the year than seen at peers. Credit Suisse expects to achieve additional cost synergies under its revised divisional structure and has increased its 2015 cost-saving target by CHF400m, which would reduce its cost run rate by around CHF4.4bn compared with 2011. While Fitch considers this achievable, the agency also notes that the bank's total operating expenses could potentially be negatively affected by higher provisions for litigation and regulatory risk, a trend observed at many of Credit Suisse's peers. The two Swiss banks, Credit Suisse and UBS AG ('A'/Stable; 'a-'/Rating Watch Positive), are the only global trading and universal banks that are already being regulated according to Basel III rules from 1 January 2013. In Q412, Credit Suisse's "look-through" CET1 ratio improved to 8.1%. The full completion of the capital measures the bank announced in July 2012 should result in an increase of the ratio to 8.4%. At this level, Fitch considers the bank's Basel III CET 1 ratio weaker than that of its strongest peers, but Credit Suisse's Swiss core capital ratio (which includes some preferred notes) was higher at 9.1%. Management has indicated that over the next five years the bank could repurchase the hybrid instruments and replace them with common equity through retained earnings. Together with high trigger contingent convertible instruments (CoCos), a substantial capital buffer in addition to core capital is available. Management expects to reach a 10% "look-through" Swiss core capital ratio by mid-2013and has announced that once the target has been achieved, it will start a capital return programme. As a result of further balance sheet deleveraging, the bank's leverage, measured as a Swiss Basel III ratio, improved further (to around 3.8% based on phased in Swiss core capital plus CoCos). As the bank is close to its CHF900bn balance sheet target (CHF924bn at end-Q412) further improvements in leverage are likely to come from reducing off-balance sheet exposures (CHF352bn), which are included in the Swiss Basel III leverage ratio calculation. The Q412 results are the first time Credit Suisse has reported under its new divisional structure following the creation of a new private banking and wealth management division, which combines the previous private banking and asset management divisions and also incorporates the majority of the Swiss securities business, which was previously reported in IB. (Caryn Trokie, New York Ratings Unit)
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