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April 17 (The following statement was released by the rating agency)
Fitch Ratings says that Credit Suisse Group AG's
(Credit Suisse, A/Stable/a) 1Q14 results reflect pressure on fixed income
earnings in the sector and highlight the importance of the group's strong wealth
management franchise and its cost reduction efforts. The results have no
immediate effect on Credit Suisse's ratings.
Credit Suisse reported CHF1.5bn 1Q14 pre-tax profit adjusted for non-controlling
interests without significant economic interest and CHF120m negative movements
in its own credit spreads. The 19% yoy decline in adjusted pre-tax profit was
largely driven by a 36% drop in the investment bank's pre-tax profit, while the
private banking and wealth management saw a 15% rise.
The group's reported net return on equity, excluding movements in its own credit
spreads, dropped to 9% in 1Q14 from 15% in 1Q13. We believe that the earnings
drop in what is seasonally the strongest quarter means that it will be
challenging for the bank to generate strong profitability in its investment bank
for the rest of FY14.
The investment bank reported CHF827m pre-tax profit after a CHF564m loss in 4Q13
but this was 36% lower than in 1Q13. The main driver for the yoy decline was
weaker net revenue in fixed income trading, which dropped 22% yoy in USD-terms,
broadly in line with those of the bank's US peers that have reported 1Q14
results to date. Fixed income sales and trading suffered from a weaker market
environment, particularly in the group's emerging markets operations and in
Equity sales and trading, which generated about 45% of sales and trading net
revenue, remained more resilient but still declined by 7% yoy (up 14% qoq) as
cash equities saw weaker performance. Underwriting and advisory net revenue
improved 9% yoy but declined qoq as underwriting volumes in the industry were
Non-strategic businesses in the investment bank continued to weigh on
performance as they generated a CHF297m pre-tax loss in 1Q14. We expect these
businesses to continue to be a drag on earnings and to be volatile, but the bank
has made further progress in reducing its non-strategic investment banking
assets, which at end-March 2014 amounted to USD79bn in Basel III leverage
exposure, USD8bn lower than at end-2013.
Private banking and wealth management saw solid performance with pre-tax profit
of CHF1bn (up 15% yoy) as pressure on net interest income was mitigated by
higher transaction and performance-based fees and recurring commissions.
Operating expenses fell 7% yoy, which underpinned pre-tax profit, and we expect
the business to remain a strong performer given the bank's global franchise and
plans to reduce operating expenses further.
Net new assets inflows in private banking and wealth management were strong at
CHF13.7bn, of which CHF10.6bn were from wealth management clients, and CHF7bn
from asset management. The division saw further net asset outflows of CHF2.1bn
from its western European cross-border business. Assets under management
remained broadly stable at CHF1,292bn as business disposals and foreign exchange
movements partially offset net new money inflows and positive market movements.
Credit Suisse's gross margin remained stable at 104bp, but the decline in
operating costs and growth resulted in a 6bp improvement in the net margin to
29bp in the quarter.
Credit Suisse's capital ratios based on risk-weighted assets (RWA) are well
within its peer group range with a fully-applied Basel III common equity Tier 1
(CET1) ratio broadly stable at 10%. Methodology changes increased RWA by CHF14bn
in 1Q14, including a CHF5.3bn increase in operational risk RWA following a
revision of the bank's internal model and increased capital requirements for
securitised assets in the trading book.
The increase in RWA is material and would have had a 100bp negative impact on
the bank's phased-in CET1 ratio were it not mitigated by reduced risk exposure
and increased capital. Credit Suisse targets an 11% Basel III CET1 ratio on a
fully-applied basis, which should give management a buffer above the regulatory
minimum requirement of 10% to manage volatility in the CET1 ratio. Volatility
could arise from changes to model-driven RWA or from future changes in
Credit Suisse's leverage ratio has also improved, and the group reported a 3.2%
Basel III Tier 1 leverage ratio at end-March 2014. This remains below leverage
ratios reported by the bank's US peers, but we expect leverage to improve
further as the bank plans to reduce leverage exposure by CHF140bn to around
CHF1,000bn in the long term. Its Basel III Tier 1 leverage ratio benefits from
the sizeable amount of Basel III additional Tier 1 capital that the bank has
issued. Credit Suisse also plans to complete its contingent capital issue plan
in 2014 by issuing a further CHF2bn of low-trigger contingent capital