Oct 26 - Credit Suisse Group AG's ('A'/Stable/'F1'/'a') Q312 results were
generally in line with Fitch's expectations that the group would generate satisfactory results
while strengthening capitalisation further and maintaining sound liquidity. In Q312, Credit
Suisse generated pre-tax profit excluding the impact from credit spread movements on own
liabilities of CHF1.4bn, a 31% increase over adjusted Q212 pre-tax profit. Adjusting for other
one-off items, which in Q312 included CHF522m gains from the sale of real estate assets and
non-core businesses as well as business realignment costs, pre-tax income was 5% higher than in
the previous quarter. These latest results have no rating implications.
The Q312 results confirmed Credit Suisse's progress in strengthening its capitalisation as
the bank has finalised the bulk of its capital strengthening measures announced in July 2012. As
a result, its end-Q312 'look-through' Basel III common equity tier 1 (CET1) ratio reached 7.5%
and its Swiss core capital ratio, which includes legacy hybrid instruments, 8.2%. The bank
expects to reach a look-through CET1 ratio of 8.5% by end-2012 and 11% by end-2013. This capital
improvement was taken into account in Fitch's affirmation of Credit Suisse's ratings earlier in
October 2012. Management has indicated that it intends to resume cash dividend payments once its
target 10% Swiss core capital ratio has been reached. However, Fitch expects the bank to
maintain strong capital ratios, and an additional CHF4.2bn of loss absorbing capital in the form
of high-trigger contingent capital (CoCo) instruments are in place to absorb potential losses.
In addition, the bank announced plans to improve its balance sheet leverage. Credit Suisse
expects to reduce its balance sheet by at least 12% to below CHF900bn by end-2013. It plans to
achieve this mainly by reducing its large repo book and by reducing balance sheet utilisation in
its prime services business and in its treasury operations. Together with the increase in core
capital from the issue of the mandatory convertible note that will convert into shareholders'
equity in March 2013, the balance sheet reduction will improve leverage to bring it closer to
its main European competitors.
Having achieved its CHF2bn expense reduction target early, Credit Suisse reported further
cost reduction targets. The bank identified an additional CHF2bn cost savings. While the initial
cost reduction concentrated on the investment bank, where CHF1.4bn cost savings have been
realised, the additional reductions are expected to be realised to a large extent from
infrastructure cost savings in centralised functions.
Fitch believes that it will be important for the bank to reduce its cost base further given
that reported operating expenses remain high in relation to revenue and regulatory and
litigation provisions have increased. Credit Suisse's cost reduction target does not include
costs related to achieve the expense reduction, which the bank expects to amount to about
CHF1.2bn by 2015, or variable compensation expenses.
Investment banking generated CHF508m pre-tax income in Q312, a 33% quarter-on-quarter (qoq)
improvement. Despite achieving its cost reduction target, operating expenses in investment
banking remained high with a 9M12 cost/income ratio of 82%. Stronger pre-tax income was
primarily driven by improved net revenues in fixed income sales and trading, which compensated
for an 11% decline in equity sales and trading revenue. In equities, Credit Suisse saw solid
performance in prime services, where it has a strong global franchise, while cash equities,
where the bank has a solid global position, were affected by weaker trading volumes.
Fixed income trading benefited from a modest recovery in market conditions, which helped the
performance in securitised products, credit and emerging markets. Revenue also reflected losses
of about CHF800m related to Credit Suisse's fixed income wind-down portfolio, whose Basel III
risk-weighted assets (RWA) had reduced to USD14bn at end-Q312 from USD57bn a year earlier.
Across the whole fixed income portfolio, the bank has sharply reduced Basel III RWA since Q311
to USD131bn at end-September 2012 from USD230bn a year earlier.
Results in private banking, which includes wealth management and Credit Suisse's domestic
retail and corporate banking activities, saw an 11% qoq decline in pre-tax income, mainly driven
by a 4% decline in revenue as transaction-based revenue fell and the previous quarter had been
boosted by seasonal performance fees. The bank continues to attract net new assets, which for
the private bank amounted to CHF5.2bn in the quarter. Assets under management (AuM) reached
CHF1,024bn at end-September, helped by market movements, but the bank's gross margin on wealth
management clients fell somewhat to 107bp.
Fitch considers the more stable earnings from Credit Suisse's wealth management and domestic
banking operations to be a positive ratings driver. Gross margins on AuM have been under
pressure in recent quarters, which partly reflects the lower transaction volumes, but also the
lower gross margin realised on ultra-high-net-worth individuals, whose relative contribution to
overall profitability is, however, higher.
Asset management generated pre-tax income of CHF222m in the quarter, which included a
CHF140m gain from the sale of Credit Suisse's stake in Aberdeen Asset Management offset by a
CHF38m impairment of an equity participation. The asset management division had net asset
outflows of CHF0.5bn in Q312, but total AuM increased and reached CHF369bn at end-September.
As part of its efforts to strengthen capitalisation, Credit Suisse in July 2012 announced
plans to sell some private equity businesses in addition to the sale of its remaining stake in
Aberdeen Asset Management, which was completed in Q312. The group now also plans to sell
its exchange-traded funds business but announced that it had no additional plans to divest asset