February 15, 2017 / 5:32 PM / a year ago

Fitch: Litigation Dents Credit Suisse's Already Weak 4Q16

(The following statement was released by the rating agency) LONDON, February 15 (Fitch) Credit Suisse reported weak 4Q16 results, as a result of both idiosyncratic and market-related challenges that are preventing its performing wealth management franchises from delivering sound profitability for the group, says Fitch Ratings. Despite good progress in unwinding legacy assets the cost of reducing this portfolio continues to weigh heavily on profitability and we expect this to continue into the medium-term. Adverse trading conditions in Asia Pacific and generating sustainable earnings in the resized sales and trading business will also be challenges. Positively, the bank has strong execution on cost-cutting, as CHF1.9 billion cost savings compared with 2015 had been achieved by end-2016, well above the bank's CHF1.4 billion cost savings target for the year. Credit Suisse generated a CHF2 billion pre-tax loss in 4Q16, adjusting for non-recurring gains. The loss was largely driven by a CHF2.1 billion litigation charge in the quarter. Excluding litigation and non-recurring gains, pre-tax income was still weak at CHF122 million for 4Q16, but materially above 4Q15's, which included sizeable mark-to-market losses. For the full year 2016, pre-tax income stood at only CHF75 million, excluding a CHF2.4 billion litigation provision and non-recurring gains. The litigation charge relates to the final settlement, reached in January 2017 with the US Department of Justice (DoJ) regarding its legacy RMBS business. The settlement is material but in our view removes a considerable source of uncertainty for the bank's capital position. The bank was given a civil monetary penalty of USD2.48 billion and agreed to provide consumer relief worth USD2.8 billion in the five years post settlement. The financial impact of this settlement was visible in 4Q16, as Credit Suisse took a further CHF2.08 billion litigation charge, which came in addition to the USD550 million previously provisioned for the matter. Under US GAAP, the provision taken in 4Q16 also includes the bank's estimate of the lifetime cost of the relief measures agreed to under the terms of the settlement. Broadly flat revenues yoy and a 5% fall in operating expenses contributed to a sound 4Q16 for the Swiss Universal Bank, which remains the largest contributor to group pre-tax income and revenue. Adjusted pre-tax profit rose 13% yoy to CHF378 million, just over half of which related to the corporate and institutional bank. In the private bank, net margins on assets under management (AuM) showed resilience (up 5bp yoy) although, in line with other large Swiss wealth managers, net new money outflows contributed to a 1% qoq fall in AuM to CHF243 billion at end-2016. These outflows reflected client tax regularisation, selected reductions in external asset managers and seasonal effects, and the bank guided it expects outflows of a somewhat lower magnitude in 2017. Net new asset growth was seen in private banking operations booked in International Wealth Management (IWM) in 4Q16, with outflows seen in Latin America linked to client tax regularisation offset by growth in Europe, Middle East and Africa. Adjusted pre-tax income in IWM, which also books the group's asset management business, rose 31% yoy to CHF300 million, 64% of which related to private banking. Challenging market conditions in fixed income trading and high operating costs negatively affected results in the Asia Pacific division (APAC), which posted CHF122 million adjusted pre-tax profit in 4Q16, 18% lower yoy. Investment banking revenues (57% of divisional revenues) continued to suffer from low client activity in rates but also lower equity sales and trading revenues. Private banking in APAC, on the other hand, saw positive net new assets and robust earnings momentum. Global Markets, which houses the group's sales and trading activities outside of APAC and Switzerland, reported just CHF5 million pre-tax income in 4Q16, despite material reductions in operating expenses and revenue improvements. Credit revenues (related mostly to sales and trading but also including underwriting) accounted for around half of divisional revenues and recovered sharply at CHF612 million (66% higher yoy), against a historically weak 4Q15, but also using 20% lower risk-weighted assets (RWAs). Higher credit asset prices and lower volatility benefitted the bank's leveraged finance franchise in the US. Equity trading revenues were 16% lower yoy, reflecting lower market volatility and trading volumes. The group showed stronger results in Investment Banking & Capital Markets, which books the group's underwriting and advisory outside of Asia Pacific and Switzerland. The division returned to profitability with a reported CHF149 million pre-tax income in 4Q16, led by materially higher debt underwriting revenues. Credit Suisse's fully-loaded CET1 ratio fell 40bp qoq to 11.6% at end-2016, which is broadly in line with Global Trading and Universal Bank (GTUB) peers. The 90bp impact of the DoJ settlement was partly offset by further deleveraging, particularly in legacy assets. The bank continues preparations for a partial sale of its domestic subsidiary, Credit Suisse (Schweiz) AG (A/F1/a/Stable), for 2017 subject to market conditions and regulatory approval, which should help generate additional capital. However, management has guided that it does not exclude exploring other strategic options. The group's fully-loaded CET1 (3.3%) and Tier 1 leverage ratio (4.4%) also fell 20bp qoq, reflecting the CHF2.1 billion litigation charge in 4Q16. These ratios will have to be increased to its too-big-to-fail going concern requirements of 3.5% (CET1 leverage ratio) and 5% (including high-trigger Tier 1 and grandfathered low-trigger Tier 1 instruments), which we expect will be reached by issuing additional high-trigger Tier 1 debt. Contact: Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Luis Garrido Analyst +44 20 3530 1631 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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