DBRS Morningstar Downgrades Credit Suisse AG’s LT Issuer Rating to “BBB”; Trend Remains Negative

DBRS Ratings Limited (DBRS Morningstar) downgraded the Long-Term Issuer Rating of Credit Suisse AG (the Bank) to ‘BBB’ from ‘A (low)’ and the Long-Term Issuer Rating of Credit Suisse Group AG (Credit Suisse, CSG or the Group), the top-level holding company to ‘BBB (low)’ from ‘BBB (high)’. The Bank’s Short-Term Issuer ratings was downgraded to R-2 (high), and CSG’s Short-Term Issuer ratings was downgraded to R-2 (middle). The trend is Negative on all ratings. The Intrinsic Assessment (IA) for the Bank is ‘BBB’, and the Support Assessment is SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS

The downgrade of Credit Suisse AG’s Long-Term ratings to BBB takes into account DBRS Morningstar’s view that CSG continues to report missteps and compliance failures, resulting in a visible weakening of the franchise as evidenced by the high level of deposit outflows in Q4 2022, alongside high costs. Today’s rating action reflects DBRS Morningstar’s increasing concerns over the Group’s ability to restore stakeholders’ confidence. The current market volatility affecting the financial sector globally has added to the negative impact resulting from CSG’s recent compliance failures, and this has led to a significant decline in Credit Suisse’s market capitalisation. In addition, the Wealth Management division, Credit Suisse’s core franchise, has not been as resilient as expected and this weakness appears likely to continue.

DBRS Morningstar notes that the Swiss Financial Market Supervisory Authority (FINMA) has confirmed that Credit Suisse is meeting the higher capital and liquidity requirements applicable to systemically important banks and that the Swiss National Bank (SNB) will provide liquidity if necessary. Subsequently Credit Suisse announced it will utilise up to CHF 50 billion and carry out a liability exchange management, measures which could provide the Bank with more time to continue with its restructuring.

The downgrade incorporates DBRS Morningstar’s concerns about CGS’s credit fundamentals, in particular CSG’s currently very weak capacity to generate earnings, affecting the Group’s financial flexibility.

The Negative trend reflects the level of uncertainty remains elevated and that CGS’s credit fundamentals could significantly deteriorate if faced with continued reduced client activity across divisions.

CSG’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company.

RATING DRIVERS

An upgrade of the ratings is unlikely in the short-term. If Credit Suisse stabilises funding at a reasonable cost while maintaining a sufficient capital buffer to execute on its transformation plan, the ratings would revert to Stable. A return to a Stable trend would also require a stabilisation of Credit Suisse’s franchise.

A downgrade of the ratings would occur if the franchise weakens further, liquidity deteriorates, or capital levels significantly weaken. It would also occur if additional significant risk management failures continue to arise.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good

CSG has a strong global franchise in private banking and wealth management, positioning itself as a leading wealth manager with specialist investment banking and asset management capabilities. CSG also has a strong presence in Switzerland as the second largest banking group. However, DBRS Morningstar considers the franchise is weakening in spite of the restructuring efforts, and has increasing concerns over the Bank’s ability to restore confidence. DBRS Morningstar also notes the impact of compliance failures and missteps, which have led to a significant decline in market confidence and the Bank’s market capitalisation.

Earnings Combined Building Block (BB) Assessment: Weak/Very Weak

The Group reported a net attributable loss of CHF 7.3 billion in FY 2022 compared to a net loss of CHF 1.7 billion in FY 2021. The FY 2022 loss included a significant impairment of deferred tax assets of CHF 3.7 billion, while the FY 2021 loss included a CHF 4.3 billion write down on Archegos. Net revenues declined to CHF 14,921 million in FY 2022 down by 34.3% Year-on-Year (YOY), as a result of reduced client activity across divisions, including considerably lower Sales and Trading, revenues affected by CSG’s strategic actions, as well as accelerated deleveraging in the context of a general slowdown in capital markets and advisory.

Reducing costs remains crucial for CSG. Operating expenses decreased by 5% to CHF 18,163 million in FY 2022, although adjusted operating expenses were stable YOY. Nonetheless, the Group expects to incur some large upfront costs by 2025. This includes restructuring charges, software and real estate impairments of approximately CHF 2.9 billion from Q4 2022 to 2024, of which approximately CHF 1.2 billion in 2023. The ability to offset these costs by planned cost savings of around CHF 2.5 billion by 2025 appear less likely given the current turmoil.

Provision for credit losses as reported by the Group was CHF 16 million in FY 2022, compared to CHF 4,205 million in FY 2021, which included the CHF 4.3 billion Archegos write down. CSG’s pre-tax loss was CHF 3,258 million in FY 2022, down from a loss of CHF 600 million in FY 2021.

Risk Combined Building Block (BB) Assessment: Moderate/ Weak

Operational risks have been dragging on for a number of years, including a number of significant risk management failures. Recently, FINMA investigated CSG’s Chairman over his comments on deposits outflows having flattened out and reversed. FINMA concluded there was not enough grounds to launch supervisory proceedings against CSG’s Chairman for potential violations of financial market laws regarding public comments about outflows at the bank. In addition, the U.S. Securities and Exchange Commission (SEC) spotted issues last week relating to cash flow statements going back three years described as technical. On March 14, 2023, CS recognised weaknesses in its internal controls over financial reporting, which could result in a risk of material misstatements in its financial statements. DBRS Morningstar notes Credit Suisse is immediately developing a remediation plan to strengthen controls.

Separately, CSG's credit quality is supported by a low level of impaired loans reflective of the Group’s strong footprint in Switzerland and extensive Wealth Management activities with a good asset quality profile.

Funding and Liquidity Combined Building Block (BB) Assessment: Good

CGS’s funding and liquidity position has clearly suffered from reputation issues. CSG experienced significant deposit outflows in Q4 2022. Customer deposits declined from CHF 392.8 billion at end-Q4 2021 to CHF 233.2 billion at end-Q4 2022 (down 40%) following negative press in the lead-up to, and following, the October restructuring announcement. Specifically, the Group experienced elevated levels of cash deposit withdrawals and non-renewal of maturing time deposits. About two thirds of the net asset outflows were concentrated in October 2022. In addition DBRS Morningstar notes the Wealth Management division registered a substantial CHF -92.7 billion net asset outflows in Q4 2022. While CSG fell below certain legal entity-level regulatory requirements, the Group remained above their LCR and NSFR requirements at all times. The Group’s LCR was 144% at end-FY 2022, down from 203% at end-FY 2021 and 192% at end-Q3 2022. The fall in its LCR reflected reduced levels of high-quality liquid assets (HQLA) following reduced cash at central banks and reduced securities held in Q4 2022. The NSFR also declined to 117% at end-FY 2022 from 127% at end-FY 2021 and 136% at end-Q3 2022, with available stable funding impacted by the deposit outflows.

On March 15, 2023, FINMA confirmed that Credit Suisse is meeting the higher liquidity requirements applicable to systemically important banks and that the SNB will provide liquidity if necessary. Subsequently Credit Suisse announced it will utilise up to CHF 50 billion and carry out a liability exchange management. Credit Suisse also announced offers by Credit Suisse International to repurchase certain OpCo senior debt securities for cash of up to approximately CHF 3 billion.

Capitalisation Combined Building Block (BB) Assessment: Moderate/ Weak

Capitalisation is negatively affected by the absence of capacity to generate earnings for the foreseeable future. CSG’s fully-loaded BIS Basel 3 Common Equity Tier 1 (CET1) was 14.1% at end-FY 2022, up from 12.6% at end-Q3 2022. The QOQ improvement in the CET1 ratio mainly reflected the share issuance made in Q4 2022 as announced in the Strategy Update. During the strategic transformation, CSG aims to maintain a CET1 ratio above 13%, and above 13.5% post transformation (and pre-Basel III) – well above minimum capital requirements set by FINMA of 9.3% for CET1, however any significant reduction in capital during the transformation plan would likely negatively affect market confidence.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/410932

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental factors that had a significant or relevant effect on the credit analysis

DBRS Morningstar views Social and Governance risk factors as ‘Significant’ rating factors for the Group’s ratings. This is reflected in the Franchise and Risk building blocks, and is largely associated with product governance issues, business ethics, and repeated failures in risk management evidenced by weak controls and monitoring of risks. CSG has had several significant top management changes following serious operational risk issues. In July 2022, a new CEO was appointed (with the prior CEO in the role for only two years) while a new chairman was appointed on January 2022. To fully restore confidence in the Group, DBRS Morningstar continues to consider that a period of management stability and track record is needed.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)

Notes:
All figures are in CHF unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022) https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations
In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, CSG FY 2022 Annual Report, CSG FY 2022 Presentation, CSG FY 2022 Press Release, CSG Q1-Q4 2022 Quarterly Earnings, CSG Q3 2022 Strategy Update. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/410931

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global FIG
Initial Rating Date: September 13, 2006
Last Rating Date: November 2, 2022

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