RPT-Fitch: CS Deal Temporarily Hits Capital, Franchise Harm Unlikely

Tue May 20, 2014 6:15am EDT

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May 20 (Reuters) - (The following statement was released by the rating agency)

Credit Suisse's USD2.8bn settlement with several US authorities announced last night represents a temporary set-back in reaching its stated capital ratio target but we do not believe it will cause significant damage to its franchise.

The guilty plea by Credit Suisse AG, the group's main banking subsidiary in Switzerland, will not result in licence withdrawals, according to the Swiss regulator's report published this morning. No further proceedings will be initiated concerning licences of Credit Suisse in the US or in the UK, the report said.

We also expect there will be no requirement to curtail existing business for any entities of the Credit Suisse group. We believe that the settlement and guilty plea will not result in any significant disruption of Credit Suisse's operations as it is in the interest of authorities to avoid material damage to the industry, including the large US banks.

There are no changes to Credit Suisse's ratings (A/Stable/a) at this stage. The bank announced it would take actions to support its capitalisation. If the measures, which include reducing risk-weighted assets and selling assets, are not successful or if the damage to Credit Suisse's franchise is materially larger than currently anticipated, we would consider reviewing the ratings, and potentially downgrading the Viability Rating.

The settlement will have a negative impact on 2Q14 pre-tax earnings of USD1.8bn (net of available legal provisions of USD1bn), which is in our view likely to result in a small pre-tax loss in 2Q14. Credit Suisse's fully applied Basel III pro-forma common equity Tier 1 (CET1) ratio at end-1Q14 would drop to 9.3% from 10.0%, which is at the lower end of its global trading and universal banks peer group. The bank has announced it will take actions to restore its fully loaded CET1 ratio to 10% by end-2014 and has reconfirmed its 11% end-2015 target. This is positive as the bank does not plan to rely on internal capital generation from operating businesses.

The Credit Suisse case is part of a broader investigation by the US authorities into the alleged assistance certain Swiss banks provided to US persons to evade or avoid paying tax. The Credit Suisse investigation has been ongoing since 2011; the bank had announced the exit from US resident cross-border business in 2009. According to a US Senate subcommittee report, Credit Suisse at end-2006 had up to CHF12bn assets under management from US customers with Swiss accounts. The bank has stated that about USD5bn of this had been verified to be tax-compliant.

Fitch views this as an example of the escalating level of fines being extracted from banks by the US authorities, including the Department of Justice. UBS went through a similar case to Credit Suisse's in 2009, which resulted in a fine of USD780m. The amount Credit Suisse has to pay is higher, even though the size of its egregious business was smaller.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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