Fitch: Credit Suisse 4Q13 Results Show Drag from Non-strategic Businesses

Fri Feb 7, 2014 10:34am EST

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(The following statement was released by the rating agency) LONDON, February 07 (Fitch) Fitch Ratings says that Credit Suisse Group AG's (Credit Suisse, A/Stable/a) 4Q13 and FY13 results reflect both the group's healthy franchises in its strategic businesses and the drag on earnings from non-strategic businesses and conduct issues, which we expect to continue in 2014. Credit Suisse's improved cost base should help to underpin profitability, and the group remains committed to achieving a further CHF1.4bn expense saving by 2015. The results have no immediate effect on Credit Suisse's ratings. Credit Suisse reported CHF630m 4Q13 pre-tax profit adjusted for the impact of non-controlling interests without significant economic interest and a CHF202m negative impact from movements in own credit spreads. Adjusted pre-tax profit fell 26% qoq and 17% yoy as the bank made a CHF473m provision for certain litigation issues in 4Q13. Of these provisions, CHF375m was booked in the investment bank, which as a result posted a CHF40m loss in 4Q13. Excluding these litigation provisions, Credit Suisse's quarterly pre-tax profit improved both qoq and yoy. FY13 adjusted pre-tax profit reached CHF4.8bn, up 21% yoy excluding CHF921m gains on asset disposals in FY12. The group generated an 11% adjusted pre-tax return on equity for FY13, which benefited from the strong performance in 1H13, while seasonality and more difficult market conditions affected results in 2H13, as was the case for its peers. The sound performance of the group's strategic businesses should help underpin its performance in 2014, but Fitch expects that conduct costs and costs related to exiting non-strategic businesses will continue to weigh on overall earnings in 2014. As the group is concentrating on key segments in its investment bank, establishing a track record to demonstrate reduced earnings volatility and the ability to manage the increased exposure to the performance of its credit and securitised products businesses will be important rating considerations. Excluding litigation provisions, the investment bank reported CHF335m pre-tax profit, about 12% lower than in 3Q13. Under its new reporting structure, Credit Suisse splits divisional performance into strategic and non-strategic businesses. In 4Q13, the strategic businesses saw net revenue improve by 2% qoq (5% fall yoy) as a 22% quarterly drop in fixed income sales and trading to CHF808m was outweighed by a 35% increase in underwriting and advisory revenue, which reached CHF951m in 4Q13. Equity underwriting performed well, and debt underwriting reflected the group's strong presence in leveraged finance. The decline in fixed income trading was a result of lower results in rates and emerging markets with a robust performance in credit and securitised products, two key focus areas for the bank, insufficient to offset this. Overall, the strategic businesses generated a 10% return on Basel III capital in 4Q13 and of 19% for FY13, helped by lower risk-weighted assets and cost improvements. The investment bank's non-strategic businesses, which include the parts of the rates business that the bank is exiting as well as remaining legacy and wind-down assets, generated a CHF525m pre-tax loss, mainly because of the litigation provision and CHF382m funding costs related to legacy hybrid capital instruments, while revenue benefited from valuation gains in fixed income assets and rates portfolios. The non-strategic portfolio generated a CHF1.6bn pre-tax loss in FY13, but the unit reduced leverage exposure by 28% in US dollar terms in 2013 and target a 75% reduction to USD24bn by end-2015. The impact of the non-strategic unit on group earnings is likely to be volatile as valuation changes on assets and further conduct costs will affect results, but should remain manageable as assets and legacy hybrid instruments in the unit decline and legacy conduct issues are resolved. Credit Suisse's private banking and wealth management generated healthy pre-tax profit of CHF870m in 4Q13, although this was dented by a CHF175m provision related to US tax matters that were booked in the division's non-strategic unit. Pre-tax profit in the division's strategic businesses reached CHF1.1bn in 4Q13, up 31% qoq (up 3% yoy). Revenue benefited from higher transaction-based fees and included performance fees in the group's asset management business while net interest revenue remained under pressure. The strategic businesses generated a strong 34% return on Basel III capital in the quarter, and the pre-tax loss in the non-strategic unit remained with CHF187m moderate. Private banking and wealth management generated CHF3.7bn pre-tax profit in FY13, providing a resilient earnings base for the group. Fitch believes that Credit Suisse's global wealth management clients business with CHF791bn assets under management (AuM) at end-2013 will be well-positioned, despite its loss-making US business, if it manages to achieve its planned cost reduction of a further CHF550m by 2015. Asset management performance has also improved as FY13 pre-tax profit improved 32% to CHF612m, and the group's domestic corporate and institutional clients unit generated CHF965m pre-tax profit for the year. Credit Suisse's fully applied Basel III common equity Tier 1 (CET1) ratio remained broadly stable qoq at 10.3% and is well within its peer group range. In addition, the group has issued a sizeable amount of additional loss-absorbing capital: as of end-2013, the group had issued CHF7.7bn 'high-trigger' contingent capital instruments (with a 7% CET1 ratio trigger) and CHF6bn 'low-trigger' contingent capital instruments. This means that at end-2013 it met the 2019 Swiss requirement of a minimum 13% CET1 plus high-trigger instruments (13.2%) and was close to meeting the 16.7% total Swiss capital requirement (16.1%). As Credit Suisse plans to issue further bail-in debt from its holding company, the amount of loss-absorbing debt should increase further. The group's Basel III leverage ratio improved further as leverage exposure was reduced but remains weaker than many of its peers. At end-2013, the bank's Tier 1 Basel III leverage ratio stood at 3.1%. The ratio benefits from the CHF7.5bn Basel III compliant additional tier 1 instruments the group has issued, and on a CET1 basis, leverage remains relatively high. The planned additional reduction in leverage exposure should help the group further improve the leverage ratio. Contact: Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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