March 23, 2016 / 5:25 PM / 4 years ago

Fitch: Credit Suisse's Accelerated Restructuring Adds to Execution Risks

(The following statement was released by the rating agency) FRANKFURT/LONDON, March 23 (Fitch) Fitch Ratings says that Credit Suisse AG's (Credit Suisse, A/Positive/a) accelerated restructuring announced today highlights that earnings downside from some of its core capital markets franchises is proving greater than expected in challenging market conditions. Credit Suisse guided that its Global Markets (GM) business will likely report a pre-tax loss in 1Q16, and announced that it is stepping up the pace of its efforts to adjust its company profile to become a less leveraged, less capital markets-driven bank and to address its inflexible cost base. However, execution risks of the new strategy highlighted by Fitch as a key rating sensitivity for Credit Suisse have heightened. To achieve its strategy, additional measures will be taken on costs, the composition of the investment banking business and its capital consumption. First, the previously announced CHF2bn net cost saving target by 2018 has been revised to CHF3bn, primarily driven by an incremental headcount reduction of around 2,000 in the investment bank, and by an increase in the proportion of discretionary investment spending. The bank now targets CHF0.8bn additional gross cost savings by 2018 than initially planned in October 2015, all of which relate to the GM division. Second, Credit Suisse targets a further reduction in GM risk-weighted assets (RWA) of around USD25bn by end-2016 to reach USD60bn, 20% below reported RWAs at end-4Q15 and 30% below its previous target for this segment. For the division, the leverage exposure target for 2016 is USD290bn, 24% lower than the previously disclosed goal for end-2015. Third, asset and business sales of around CHF1bn in 2016 are aimed at supporting the bank's 11%-12% fully-loaded Basel III Common Equity Tier 1 (CET1) ratio target, which will likely come under pressure due to additional restructuring expenses, largely front-loaded in 2016. We believe the revised strategy shows the immediate challenges the bank is facing in resizing its capital market activities in a difficult market environment and highlights the risks to Credit Suisse's capitalisation in 2016, especially after its fully-applied Basel III CET1 ratio already fell by about 80bps q-o-q to 11.4% in 4Q15. If executed successfully, we expect the securities and investment banking businesses' contribution to group RWAs to fall materially from around 50% currently (including Investment Banking & Capital Markets (IBCM), GM and part of the sales and trading activities in the Asia Pacific Division), which could reduce Credit Suisse's potential earnings volatility and risk exposure in the medium term. However, we expect a number of execution risks on the way to reaching these strategic goals. First, achieving the reduction of the strategic resolution unit (SRU) according to plan is conditional on successfully unwinding often illiquid positions and asset sale. Savings in the SRU are expected to account for a large share of the bank's overall cost savings and may be difficult to achieve given the challenging operating environment and the additional USD10bn-15bn in RWAs being added to the unit. Second, reducing products and services in capital markets may negatively affect Credit Suisse's franchise and revenue in other core businesses, including in Asia Pacific, one of the bank's main growth areas. Third, improving Credit Suisse's earnings profile in the medium term will depend on the bank's ability to stabilise the performance of IBCM, GM and International Wealth Management after two consecutive years of falling revenues. Fourth, further unforeseen but not impossible litigation costs and negative adjustments to defined benefit pension assets as a result of potential rate reductions by the Swiss National Bank may pose further challenges. The announcement has no immediate effect on Credit Suisse's ratings, but will be considered in the context of 1Q16 results for Credit Suisse and its global trading and universal bank peers. The Positive Outlook on Credit Suisse AG's IDR (but not Credit Suisse Group AG's) primarily reflects our view that due to a build-up of substantial buffers of qualifying junior debt, including around CHF15bn total loss absorbing capacity (TLAC) debt issued indirectly out of the holding company, default risk of senior creditors at Credit Suisse AG is becoming lower than the risk of the bank failing (as reflected in its Viability Rating). However, our assessment of the bank's capitalisation and any potential rating uplift are considered in the context of the bank being able to stabilise and restore core underlying earnings retention as it implements its restructuring plan. Contact: Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Elaine Bailey, London, Tel: +44 203 530 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. 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