PDF Moody's - Credit Opinion - Credit Suisse Group AG

FINANCIAL INSTITUTIONS

CREDIT OPINION

14 September 2018

Update

RATINGS

Domicile Long Term Debt Type

Outlook

Zurich, Switzerland Baa2 Senior Unsecured - Fgn Curr Stable

Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date.

Contacts

Michael Rohr

+49.69.70730.901

VP-Sr Credit Officer

michael.rohr@

Mark C Jenkinson

+44.20.7772.5432

Associate Analyst

mark.jenkinson@

David Fanger

+1.212.553.4342

Senior Vice President

david.fanger@

Laurie Mayers

+44.20.7772.5582

Associate Managing Director

laurie.mayers@

Ana Arsov MD-Financial Institutions ana.arsov@

+1.212.553.3763

Credit Suisse Group AG

Update to credit analysis

Summary

We assign a Baa2 stable senior unsecured debt rating to Credit Suisse Group AG (CS) as well as A1 stable/P-1 senior unsecured debt and deposit ratings to its principal bank subsidiary, Credit Suisse AG. We further assign a baa2 Baseline Credit Assessment (BCA) and Adjusted BCA to Credit Suisse AG1 as well as an A1/P-1 Counterparty Risk Rating (CRR).

Credit Suisse AG's baa2 BCA is underpinned by the strong progress CS has made in reducing tail risks to earnings and capital as a result of its three-year restructuring program, which commenced in late 2015 and included the successful settlement of legacy litigation issues. The bank's credit profile is further supported by the stable earnings and lower risk profile of the bank's large global wealth management franchise and well-positioned domestic Swiss banking franchise producing a high share of recurring revenues as well as its sound liquidity position. We also expect the bank to largely maintain its strengthened capital position, despite ongoing regulatory pressures and slightly higher payout ratios.

The baa2 BCA remains constrained by the group's comparatively higher dependence on transaction-driven capital market revenues compared with many of its closest global investment banking peers. While execution challenges from its three-year restructuring program have eased, CS's profitability metrics still fall short if compared with those of similarly rated peers. From 2019 onward, however, we anticipate profitability to meaningfully benefit from the reduced costs of off-loading non-core assets2, as well as lower funding and restructuring costs.

Liquidity Factors

Exhibit 1

Credit Suisse Group AG rating scorecard - Key financial ratios

Solvency Factors

20% 18% 16% 14% 12% 10%

8% 6% 4% 2% 0%

Credit Suisse Group AG (BCA*: baa2) 17.2%

0.8%

Asset Risk: Problem Loans/

Gross Loans

Capital: Tangible Common Equity/Risk-Weighted

Assets

0.2%

Profitability: Net Income/ Tangible Assets

Median baa2-rated banks

39.9%

46.4%

Funding Structure: Market Funds/

Tangible Banking Assets

Liquid Resources: Liquid Banking Assets/Tangible Banking Assets

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Solvency Factors (LHS)

Liquidity Factors (RHS)

*The baa2 BCA relates to Credit Suisse Group AG's operating bank, Credit Suisse AG. Source: Moody's financial metrics

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Credit strengths

? Large global wealth management franchise and well-positioned domestic banking franchise provide a significant source of stable and largely predictable earnings

? Improved capital position will be largely maintained, despite regulatory pressures

? Good risk management, with a proactive approach to risk taking, risk limits and controls

? Sound liquidity position and conservative liquidity management

Credit challenges

? Relatively weak profitability versus its global investment bank (GIB) peers, and only set to improve more significantly from 2019 onwards

? The group's integrated business model will continue to rely on a higher share of capital markets businesses versus other GIBs

? Confidence-sensitive customer base and significant reliance on wholesale funding sources

Outlook

? The outlook for Credit Suisse's ratings is stable, reflecting its strong capital position, good risk management, and sound liquidity position.

? The stable outlook further takes account of progress made thus far in implementing the group's evolving strategy and we expect execution to continue, supporting the group's earnings stability and - over time - improving its currently sub-par profitability metrics.

Factors that could lead to an upgrade

? Upward pressure on CS's ratings could arise if the group (1) were to successfully achieve a substantial and sustainable improvement in its profitability metrics; (2) achieved a meaningful further reduction of its risk profile; and (3) significantly reduced its reliance on earnings from its capital markets businesses.

? Any upgrade remains further contingent on the group reducing its wholesale funding dependence to a level commensurate with higher rated peers.

Factors that could lead to a downgrade

? The ratings could be downgraded if CS (1) failed to successfully execute the planned changes to its business model, in particular if it failed to meaningfully reduce funding and restructuring costs or if it failed to increase revenues from their now lower base post right-sizing; (2) were to suffer from a significant control or risk management failure; or (3) materially increased its risk appetite.

? The ratings may also be downgraded in the event of a significant decline in the Swiss economy, or an unexpected and meaningful deterioration in the group's capital or liquidity profile.

? The ratings could further be downgraded should there be a significant and larger-than-anticipated decrease in the banks' existing bail-in-able debt cushion leading to a higher loss severity for its different debt classes. Although regarded unlikely at present, this may lead to fewer notches of rating uplift as a result of our Advanced LGF analysis.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

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Credit Suisse Group AG: Update to credit analysis

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Key indicators

Exhibit 2

Credit Suisse Group AG (Consolidated Financials) [1]

6-182

12-172

12-162

12-152

12-142 CAGR/Avg.3

Total Assets (CHF billion)

793

791

814

814

913

-3.94

Total Assets (EUR billion)

684

676

759

748

759

-2.94

Total Assets (USD billion)

799

812

800

813

919

-3.94

Tangible Common Equity (CHF billion)

48

47

43

47

43

3.44

Tangible Common Equity (EUR billion)

41

40

40

44

35

4.44

Tangible Common Equity (USD billion)

48

48

43

47

43

3.44

Problem Loans / Gross Loans (%)

0.7

0.8

0.9

0.7

0.5

0.75

Tangible Common Equity / Risk Weighted Assets (%)

17.2

17.1

16.1

16.3

14.9

16.36

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%)

4.3

4.4

5.6

4.1

3.2

4.35

Net Interest Margin (%)

1.1

1.1

1.2

1.4

1.3

1.25

PPI / Average RWA (%)

1.7

0.9

-0.7

0.7

0.9

0.76

Net Income / Tangible Assets (%)

0.4

0.4

-0.2

0.2

0.3

0.25

Cost / Income Ratio (%)

78.7

88.4

110.7

91.7

89.2

91.75

Market Funds / Tangible Banking Assets (%)

40.8

39.9

43.2

40.0

42.3

41.35

Liquid Banking Assets / Tangible Banking Assets (%)

44.3

46.4

49.2

47.2

49.7

47.45

Gross Loans / Due to Customers (%)

86.7

85.7

88.8

89.8

86.4

87.55

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; US GAAP [3] May include rounding differences due to scale

of reported amounts [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latest

accounting regime. [6] Simple average of Basel III periods presented

Source: Moody's Financial Metrics

Profile

Credit Suisse Group AG is a global banking and financial services group and the holding company of the Switzerland-based bank Credit Suisse AG. It provides private banking, asset and wealth management, and investment banking services to corporate, institutional and government clients, high-net-worth individuals (HNWI) and ultra-high-net-worth individuals (UHNWI) worldwide, as well as affluent and retail clients in Switzerland. As of 30 June 2018, it reported total consolidated assets of CHF798 billion and assets under management of CHF1.4 trillion.

The bank's BCA benefits from its Strong+ Macro Profile Whilst nearly three-quarters of Credit Suisse's revenues are derived from activities in Switzerland and North America, operating environments to which we assign Very Strong- Macro Profiles, this is partly offset by the bank's sizeable operations in the European Union (Strong) and in the Asia Pacific region (Moderate+), which have weaker Macro Profiles. This results in a Strong+ weighted Macro Profile for Credit Suisse.

Although Credit Suisse's strategic plan will likely result in some reduction in the contribution from North America and the rest of Europe, and an increase in the contribution from Switzerland and Asia Pacific, we do not expect these changes to be of such a magnitude to change the weighted Macro Profile.

Detailed credit considerations

Large global investment banking activities constrain creditworthiness despite recent right-sizing; and growth ambitions pose execution risks We assign a baa2 Asset Risk score to Credit Suisse AG, six notches below its aa2 initial3 score. The negative adjustment captures the group's higher reliance on and exposure to capital markets activities than many of its large GIB peers. We estimate that, post restructuring, the capital markets business segments spread across the GM, IBCM, APAC and SUB IB segments4 will account for around 30% of the group's pre-tax profits, 40% of total risk-weighted assets and 50% of the group's leverage exposure. We believe that CS's exposure to global investment banking activities will continue to pose risks for creditors due to the volatile revenue profile, the inherent risk-management and risk-governance challenges these businesses present, the opacity of risk taking, and the confidence-sensitivity of their customer and funding franchises.

3 14 September 2018

Credit Suisse Group AG: Update to credit analysis

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Exhibit 3

Credit Suisse's investment bank focuses more on fixed income CHF million

Equity Sales & Trading 28%

Advisory 9%

Equity Underwriting 8%

Debt Underwriting 20%

Fixed Income Sales & Trading 35%

Sources: Company reports, Moody's Investors Service estimates

The assigned baa2 Asset Risk score also takes account of the notable success of Credit Suisse's restructuring, de-risking and right-sizing program initially announced in late October 20155. Besides capturing (1) the significant market, counterparty and operational risks intrinsic to the group's investment banking business; (2) CS's high share of capital markets related activities; as well as (3) litigation risks inherent in CS's international private banking and wealth management operations, our assigned baa2 Asset Risk score positively takes account of the group's low problem loan ratio and generally sound risk management capabilities. Historically, CS has had a low level of asset risk within its wealth management and Swiss universal banking businesses, as reflected in the group's low problem loan ratio (0.7% as of 30 June 2018). However, CS's loan growth targets could add greater asset risks in the non-investment banking units such as its growth ambition in non-standard securities-based lending in international wealth management (IWM).

Because we consider capital markets activities to be both opaque and potentially volatile, posing significant challenges for the management of such firms, this structural weakness results in a one-notch negative qualitative adjustment to Credit Suisse AG's BCA in respect of opacity and complexity, an adjustment shared with all large global investment banks.

Capital ratio restored; and leverage requirement will benefit from rebates Our assigned Capital score of aa2, in-line with the group's aa2 initial score, reflects the strengthened capital position and leverage ratio as well as our expectation that the bank's generally conservative approach to capital management will help to largely sustain the achieved capital levels and ratios despite regulatory pressures, reducing risks for creditors.

CS reported a Swiss fully-applied common equity Tier 1 (CET1) capital ratio of 12.8% in the quarter, virtually unchanged from 12.9% in Q1 2018 and down from 13.3% as of 30 June 2017 (see Exhibit 4). The year-over-year decline was largely owing to a 7% increase in risk-weighted assets (RWAs) following business growth. Retained earnings supported underlying capital and the stabilisation of the CET1 ratio above the group's 12.5% target. CS further reported a slightly improved 3.9% CET1 leverage ratio and a 5.2% Tier 1 leverage ratio as of 30 June 2018.

As part of its current analysis on the impact of the enactment of the Tax Cuts and Jobs Act, in particular the new minimum tax regime (so-called BEAT6), CS anticipates it may not become subject to the BEAT, lowering its US tax liability. If CS stays 'off BEAT', the group tax rate is expected to fall by approximately five percentage points towards 30% in 2018 and towards the mid twenties in 2019, supporting its bottom-line profitability and, thereby, capital-generation capacity.

4 14 September 2018

Credit Suisse Group AG: Update to credit analysis

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Exhibit 4

Credit Suisse's CET1 and Tier 1 leverage ratios remained stable at the median of Moody's-rated GIBs Common equity Tier 1 (CET1) and Tier 1 leverage ratios, as of 30 June 2018

18.0% 16.5%

CET1 ratio

Tier 1 Leverage ratio

Median CET1 ratio (12.8%)

Median leverage ratio (5.2%)

15.0% 12.0%

14.2%

13.7%

13.4%

13.0%

12.8%

12.8%

12.4%

11.5%

11.5%

11.5%

11.1%

10.9%

9.0% 6.0% 3.0%

6.4%

5.4%

4.0%

5.0%

4.9%

6.5%

5.2%

6.6%

6.7%

5.8%

4.0%

4.1%

4.3%

0.0%

MS

HSBC

DB

UBS*

BCS**

JPM

CS*

C

BAC

GS

BNP

SG

RBC

Notes: (1) RBC's second quarter ended in April 2018; Q2 2018 for the rest; (2) Basel III fully phased in advanced approach for all US banks. Citigroup (C) has only reported CET1 ratio under the standardized approach (12.1% for Q2 2018) which is the binding constraint. The CET1 ratio under the advanced approach shown in the chart is Moody's estimate; (3) Tier 1 leverage ratio for US banks is the supplemental leverage ratio (SLR). *UBS and CS leverage ratio reflect Common Equity Tier plus Low Trigger Additional Tier 1 and High-Trigger Additional Tier 1 securities. **Barclays (BCS) leverage is reflective of the spot UK leverage ratio. Sources: Companies' results presentations and financials, Moody's Investors Service

Under Swiss TBTF requirements, Credit Suisse will need to meet a 3.5% CET1 leverage ratio and 5.0% Tier 1 leverage ratio and a corresponding risk-based 10% CET1/RWAs ratio and 14.3% Tier 1/RWAs ratio by end-2019. In addition, the group received a rebate on its phase-in gone-concern7 leverage ratio requirements of 0.28% and approximately 0.87% of RWA of the gone-concern RWAs requirements, as the Swiss regulator acknowledged CS's improved overall recoverability and resolvability. We see the stronger capital buffers as an important protection for creditors during the final implementation phase of the group's strategic plan.

Moreover, the group's Intermediate Holding Company (IHC) in the US, Credit Suisse Holdings (USA), Inc., was reviewed under the US Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) process, comprising a confidential review of its capital plan in 2017 and on a public basis in 2018. As a result of its review, the Board of Governors of the Federal Reserve System approved the IHC's 2018 capital plan on both a quantitative as well as qualitative basis. The plan included capital distributions to its parent, Credit Suisse AG, during the four quarters beginning in the third quarter of 2018 through the end of the second quarter of 2019.

Under the CCAR's adverse and severely adverse scenarios, Credit Suisse Holdings (USA), Inc. displayed a projected minimum CET1 capital ratio of 19.6% and 17.2%, respectively, the highest of all banks subject to the CCAR process. In addition, the IHC's projected supplementary leverage ratio stood at 7.7% and 6.6% under the CCAR's adverse and severely adverse scenarios, respectively. These ratios are significantly in excess of the required minimum capital and leverage ratios in CCAR 2018 (4.5% for CET1 and 3.0% for supplementary leverage ratio8). We view these results as credit positive.

Profitability will lift off significantly...starting in 2019 Our assigned ba1 Profitability score reflects our expectation of continued weakness in profitability, yet already includes our anticipation of the burden from larger one-off charges9 fading. The three-notch positive adjustment from our b1 initial score takes account of CS's improved underlying profitability in 2017, with a Net Income (NI)/Tangible Assets (TA) ratio of 0.4%, which we expect the bank to be able to repeat in 2018.

From 2019 onward, we anticipate CS's profitability to increasingly benefit from the reduced costs of off-loading non-core assets, lower funding costs as more expensive legacy capital instruments are redeemed and the near absence of meaningful restructuring costs. In particular, CS's SRU will likely no longer be a major strain on the group's profitability.

5 14 September 2018

Credit Suisse Group AG: Update to credit analysis

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