Fitch: Credit Suisse's Accelerated Restructuring Adds to Execution Risks Mittwoch, 23. März 2016 - 20:03
Fitch: Credit Suisse's Accelerated Restructuring Adds to Execution Risks
Fitch Ratings-Frankfurt/London-23 March 2016: 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.