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Fitch: Credit Suisse's Q313 Dented by Weak Fixed Income Markets; Further Strategic Repositioning
October 25, 2013 / 3:27 PM / in 4 years

Fitch: Credit Suisse's Q313 Dented by Weak Fixed Income Markets; Further Strategic Repositioning

(The following statement was released by the rating agency) MILAN/LONDON, October 25 (Fitch) Fitch Ratings says that Credit Suisse AG's ('A'/'F1'/'a') Q313 results reflected weak market conditions in the quarter but also demonstrate that the bank's targeted further reduction in risk-weighted assets (RWA), leverage exposure and operating expenses will be important to reduce earnings volatility. The results have no immediate impact on Credit Suisse's ratings, but the bank's ability to generate adequate returns for risks taken remains an important rating consideration. Q313 pre-tax profit adjusted for a CHF163m fair value movement in own credit and a CHF150m net profit from discontinued operations fell 29% qoq to CHF1,070m as pre-tax profit in the investment bank dropped 70% to CHF229m in the quarter. Compared to Q312, the group's adjusted pre-tax profit fell 27%. Credit Suisse identified an additional CHF11bn Basel III RWA as non-strategic and announced that it will set up separate units in its divisions to manage these down, together with already existing wind-down and legacy business (RWA: CHF14bn). The bulk of the newly identified non-strategic RWA will be transferred from the bank's rates business, which will be scaled down significantly. Balancing the weaker quarterly results, the group continued to strengthen its capitalisation, reporting a 10.2% Basel III common equity Tier 1 (CET1) ratio and improved leverage ratios. Credit Suisse's adequate performance in Q113 and Q213 means that 9M13 adjusted pre-tax profit increased 5% yoy, and the bank generated a 14% adjusted pre-tax ROE in 9M13 (10% in Q313). The group's Q313 performance was negatively affected by the performance of its investment bank (securities business), where pre-tax profit fell to CHF229m from CHF754m in the previous quarter. The third quarter is a seasonally weak quarter for securities businesses, but the result was less than half adjusted pre-tax profit in the same quarter the previous year (Q312: CHF483m). Net revenue in fixed income sales and trading fell 34% qoq (42% yoy), reflecting difficult market conditions with lower client activity and a weak performance of the group's rate business. Credit Suisse has solid franchises in credit and securitised products and benefited from solid leveraged finance and asset finance performances. Equity sales and trading was more resilient with net revenue declining 20% qoq but improving 8% yoy. Net revenue from underwriting and advisory activities also declined both qoq and yoy. Overall, the 26% qoq decline in Credit Suisse's net revenue in the investment bank was more pronounced than that of most of its US peers for the third quarter, but the group has also reduced Basel III RWA in the division substantially by 19% yoy. Operating expenses in the investment bank remained under control as they fell 12% qoq, but the weak revenue generation meant that the division's cost/income ratio deteriorated to 90.8% for the quarter. Credit Suisse has largely achieved its CHF1.9bn targeted cost reduction in the investment bank and expects further savings from scaling down its rates business, where it plans to exit less profitable segments, targeting an RWA reduction of almost 50% by 2015. Credit Suisse's private banking and wealth management continued to provide the group with more resilient earnings, which Fitch considers an important driver for Credit Suisse's rating. The division reported CHF836m pre-tax profit adjusted for a CHF206m pre-tax gain on the disposal of the group's ETF and parts of the private equity business and other disposals. Q313 pre-tax profit in the division fell 9% qoq but remained stable yoy. Net revenue from wealth management clients declined qoq given a seasonally weaker quarter and remained static compared to Q312 as the net interest revenue remains under pressure in a low-interest rate environment while fees and commissions improved. Credit Suisse's corporate and institutional clients business saw broadly stable performance both yoy and qoq and generated CHF240m in Q313. Asset management generated CHF268m pre-tax profit in Q313, which however included a CHF219m gain from disposals. Total assets under management (AuM) of the private banking and wealth management division fell 2.2% qoq to CHF1,268bn, driven by foreign exchange movements and the disposal of businesses. The group recorded sound inflows of net new money at CHF8.1bn, mainly in the Americas and Asia Pacific, which is in line with the strategy to expand activities in growth markets. Credit Suisse targets further cost reductions in its wealth management operations and announced the closure of unprofitable private banking locations but continues to target expansion in the ultra-high net-worth client segment and in emerging markets. As part of its strategy, the bank targets a further CHF600m reduction in operating expenses in private banking and wealth management by 2015. As part of its reorganisation, Credit Suisse will establish a non-strategic unit in private banking and wealth management, which will however remain relatively small, with Basel III RWA of CHF6bn and total assets of CHF21bn. As a global trading and universal bank, and one that is active in wealth management, Credit Suisse is exposed to litigation and regulatory risks and is involved in various litigation and regulatory proceedings. These include the resolution of tax matters with the US authorities. Q313 net litigation provisions amounted to CHF180m (Q213: CHF155m), in contrast to substantial provisions at some peers. Management assesses that the aggregate maximum losses for certain litigation cases that can be estimated and that are not covered by provisions could amount to CHF2.2bn, almost unchanged from the estimate in the previous quarter. Fitch expects the bank to be able to manage legal and other conduct costs out of earnings, but any sizeable litigation charges that affected the bank's capital could put its ratings under pressure. Despite the drop in earnings, Credit Suisse Group's capitalisation continued to improve as its Fitch Core Capital ratio reached about 11.7% at end-September 2013. The group's Basel III CET1 ratio on a 'look-through' basis improved further to 10.2% at end-quarter, which places it well within its peer group. In October 2013, the group exchanged EUR3.8bn legacy hybrid Tier 1 notes into high-trigger capital instruments, which brings the volume of high-trigger buffer capital notes (with a 7% CET1 ratio trigger) to CHF4.1bn and means that the group meets the Swiss regulatory requirement of meeting a 13% capital requirement to be met with CET1 and high-trigger contingent capital. The bank improved its leverage ratio to 2.7% based on a Basel III calculation and including Basel III additional Tier 1 instruments. Fitch expects that the announced further reduction in leverage exposure means that the bank should meet the minimum leverage ratio well before the regulatory deadline. Fitch considers the group's leverage improving, but still somewhat weaker than some of its European peers. This is mitigated by the bank's large buffer of loss-absorbing capital instruments, but the agency expects assets and off-balance sheet exposure to decline and leverage to improve. Credit Suisse's ratings are based on Fitch's expectation that the bank will reduce leverage and otherwise maintain strong capital ratios in line with its peers. Contact: Christian Scarafia Senior Director +39 02 87 90 87 212 Fitch Italia S.p.A. V.lo S Maria alla Porta, 1 20123 Milan Christian Kuendig Senior Director +44 20 3530 1399 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on 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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