TEXT - Fitch says Credit Suisse Q4 results ratings neutral

Fri Feb 8, 2013 10:18am EST

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(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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