DBRS Morningstar Comments on Credit Suisse's Plans to Update Strategy

Credit Suisse Group AG (CSG) (rated A low, Negative trend) is set to update the market on an updated strategy at the end of October 2022. In an announcement on 26th September 2022, the Group stated it is on track to complete a strategic review which might include asset and business sales. In the last year, the Group presented a strategic plan and also had significant management changes. The Russia-Ukraine conflict, high inflation, and upward interest rate trajectories are creating a difficult operating and economic environment for all capital markets institutions globally. Whilst some banks and businesses could benefit from high market volatility, DBRS Morningstar believes that for CSG the challenges are being exacerbated by the various management changes in a short period of time, alongside the challenges to define and execute a clear strategy, particularly in its Investment Bank. Management stability is a key consideration for any organisation’s reputation as robust management should be able to design and execute a consistent strategy that preserves the value of the franchise and count on the support of shareholders and investors.

In Q4 2021, the Group announced a strategic plan for 2022-2024, which DBRS Morningstar considered as necessary to restore confidence in the franchise and the newly appointed management after the Archegos and the Supply Chain Finance Funds management failures in Q1 2021. The strategic initiatives focused on simplifying the Group’s organisational structure, reinforcing the Wealth Management business, reducing risk in the Investment bank and costs and most importantly restructuring risk management. As part of the strategy, CSG has exited the majority of Prime Brokerage services, and is reducing its Corporate Bank exposure and Global Trade Services (GTS) Businesses, including repositioning its Ship Finance business. A focus on cutting back businesses that lack a strong link with its Wealth Management Business was also announced. Taking this into account, the management anticipated 2022 was going to be a transitional year, sustained by some business sales and potential additional losses.

Since the announcement of that strategic plan in October 2021, progress in executing the strategy has been overshadowed by unexpected significant management changes at the top level. A new Chairman, Axel P. Lehmann, was appointed in January 2022 after the former chairman, Mr. Horta-Osorio, resigned. Later in July 2022, Thomas Gottstein stepped down as Chief Executive Officer (CEO), and Ulrich Körner took over. Gottstein was part of the management team responsible for Archegos and Supply Chain Finance issues. As a result, DBRS Morningstar considers the change in CEO as closing the circle of management changes following the Archegos and Supply Chain Finance issues.

Along with the announced change in CEO at end-July 2022, a deeper strategic review was initiated. CSG aims to maintain a capital-light Investment Bank by reducing capital consumption and focusing on advisory and markets business. The Group also announced that is looking at various strategic options for its securitized products platform. DBRS Morningstar believes that an update on the strategy makes sense given the change in CEO but also reflects that the worsening operating conditions are likely putting additional pressure on the Group’s profitability, requiring additional actions.

As a result of the change in market conditions DBRS Morningstar considers the Group as likely to incur higher costs than initially anticipated when the strategy was defined in 2021, particularly if it comes with business disposals, the creation of a resolution unit, and further restructuring. DBRS Morningstar has concerns that the Bank’s franchise is weakening in some areas. With revenues under pressure for some quarters now, DBRS Morningstar considers the Group has less flexibility to cope with potential sizeable losses derived from winding down assets, market volatility, and higher costs. This could also lead to weakening of the Group’s capital position. Against this backdrop, the current management still needs to demonstrate that it is successfully strengthening the Group’s risk and control functions at the same time as implementing a strategy that restores CSG’s franchise strength. In this respect, DBRS Morningstar will continue to monitor the developments in relation to the Group’s updated strategy and potential implications for the franchise and capital position in the short-term.

DBRS Morningstar rates CSG’s Long-Term ratings at A (low) with a Negative trend at the holding company and Credit Suisse AG’s Long-Term ratings “A”, also with a Negative trend. The A (low) level is underpinned by the Group’s sound capital position and takes into account that the Group has taken actions to improve risk management, including several management changes and is de-risking through the exit of some investment banking businesses. However, the Negative trend reflects that the full reputational and franchise impact of risk management shortcomings could translate into lower business volumes. This, together with higher expected costs, has the potential to reduce the Group’s financial flexibility. CSG’s capital levels are one of the key considerations supporting CSG’s current ratings. At end-June 2022, the CET1 ratio was 13.5%, after considering net losses attributable to shareholders in the half year of CHF 1.9 billion, a level that is in line with similarly rated peers.