FINANCIAL INSTITUTIONS ISSUER COMMENT 14 February 2018 Contacts Michael Rohr +49.69.70730.901 VP-Sr Credit Officer [email protected]Mark C Jenkinson +44.20.7772.5432 Associate Analyst [email protected]David Fanger +1.212.553.4342 Senior Vice President [email protected]Laurie Mayers +44.20.7772.5582 Associate Managing Director [email protected]Ana Arsov +1.212.553.3763 MD-Financial Institutions [email protected]CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Credit Suisse Group AG Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results In Q4 2017 1 , Credit Suisse Group AG (CS, Baa2 stable 2 ), the parent holding company of Credit Suisse AG (A1 stable/A1 stable, baa2 3 ) reported 4 consolidated pre-profits of CHF141 million (unadjusted) and a net loss of CHF2.1 billion. The Q4 net result was heavily burdened by a CHF2.3 billion noncash charge related to the US’ enactment of the Tax Cuts and Jobs Act (Tax Act). Excluding this write-down and other items, adjusted pre-tax profits would have been CHF569 million, up significantly from Q4 2016 (CHF171 million). This corresponds to an annualised net return on average tangible equity of 6.0% (Moody's calculation), compared to 1.8% a year ago. Being in-line with our expectations, we view the results as credit neutral. Negligible effect from US tax law changes. CS reported a Swiss fully-applied common equity Tier 1 (CET1) capital ratio of 12.8% in the quarter, down from 13.2% in Q3 2017 (see Exhibit 1). The decline was largely owing to an increase in operational risk RWAs 5 , while the CHF2.3 billion one-time charge related to the revaluation of certain US net deferred tax assets had no material impact on CS's CET1 capital ratio. CS further reported an unchanged 3.8% CET1 leverage ratio and a 5.2% Tier 1 leverage ratio on a fully applied basis. As part of its current analysis on the impact of the enactment of the Tax Act, in particular the new minimum tax regime (so-called BEAT 6 ), 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 to below 25% in 2019. Credit Suisse continued reducing its cost base as well as non-core losses, offsetting Investment Banking weaknesses and supporting group profitability. CS's operating expenses declined 6% year-over-year, bringing the total net cost savings to CHF1.4 billion in 2017, above its CHF0.9 billion full-year net cost reduction target. The cost reduction, together with a 5% increase in adjusted operating income supported the increase in underlying adjusted pre-tax profits to CHF2.8 billion in 2017, from CHF615 million in 2016. In Q4 2017, capital markets revenues 7 were down in Asia Pacific Markets (-14% year-over- year), in both equity (-13%) and fixed income sales and trading (-28%). Revenues were also down in Global Markets (-8%) and Investment Banking and & Capital Markets (-2%) as a solid fixed income sales and trading result (-3%) and good underwriting fees (+30%) could not offset weakness in equity sales and trading (-27%) as well as advisory (-23%). Strong revenue increases across International Wealth Management (+12%) and Asia Pacific Wealth Management and Connected (+12%) helped offset this more pronounced weakness.
Credit Suisse Group AGQ4 2017: Solid wealth management and lower legacy losseslargely offset weaker capital markets results
In Q4 20171, Credit Suisse Group AG (CS, Baa2 stable2), the parent holding company ofCredit Suisse AG (A1 stable/A1 stable, baa23) reported4 consolidated pre-profits of CHF141million (unadjusted) and a net loss of CHF2.1 billion. The Q4 net result was heavily burdenedby a CHF2.3 billion noncash charge related to the US’ enactment of the Tax Cuts and JobsAct (Tax Act). Excluding this write-down and other items, adjusted pre-tax profits would havebeen CHF569 million, up significantly from Q4 2016 (CHF171 million). This corresponds toan annualised net return on average tangible equity of 6.0% (Moody's calculation), comparedto 1.8% a year ago. Being in-line with our expectations, we view the results as credit neutral.
Negligible effect from US tax law changes. CS reported a Swiss fully-applied commonequity Tier 1 (CET1) capital ratio of 12.8% in the quarter, down from 13.2% in Q3 2017 (seeExhibit 1). The decline was largely owing to an increase in operational risk RWAs5, while theCHF2.3 billion one-time charge related to the revaluation of certain US net deferred taxassets had no material impact on CS's CET1 capital ratio. CS further reported an unchanged3.8% CET1 leverage ratio and a 5.2% Tier 1 leverage ratio on a fully applied basis. As partof its current analysis on the impact of the enactment of the Tax Act, in particular the newminimum tax regime (so-called BEAT6), CS anticipates it may not become subject to theBEAT, lowering its US tax liability. If CS stays 'off BEAT', the group tax rate is expected to fallby approximately five percentage points towards 30% in 2018 and to below 25% in 2019.
Credit Suisse continued reducing its cost base as well as non-core losses, offsettingInvestment Banking weaknesses and supporting group profitability. CS's operatingexpenses declined 6% year-over-year, bringing the total net cost savings to CHF1.4 billionin 2017, above its CHF0.9 billion full-year net cost reduction target. The cost reduction,together with a 5% increase in adjusted operating income supported the increase inunderlying adjusted pre-tax profits to CHF2.8 billion in 2017, from CHF615 million in 2016.
In Q4 2017, capital markets revenues7 were down in Asia Pacific Markets (-14% year-over-year), in both equity (-13%) and fixed income sales and trading (-28%). Revenues were alsodown in Global Markets (-8%) and Investment Banking and & Capital Markets (-2%) as asolid fixed income sales and trading result (-3%) and good underwriting fees (+30%) couldnot offset weakness in equity sales and trading (-27%) as well as advisory (-23%). Strongrevenue increases across International Wealth Management (+12%) and Asia Pacific WealthManagement and Connected (+12%) helped offset this more pronounced weakness.
Credit Suisse's CET1 and Tier 1 leverage ratios remained stable around the median of Moody's-rated Global Investment BanksCommon equity Tier 1 (CET1) ratios and Tier 1 leverage ratios, as of 31 December 2017
16.9%
14.6%13.8% 13.8%
13.1% 12.8%
12.7% 12.3% 11.7% 11.5% 11.3% 10.9% 10.7%
6.4%5.7%
4.7%
3.8% 4.4%
5.2%6.5% 6.7%
4.6%
6.9%
4.3% 4.4%
5.8%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
MorganStanley
HSBCHoldings*
UBS DeutscheBank***
Barclays* Credit Suisse JP Morgan Citigroup BNPParibas***
Bank ofAmerica
SocieteGenerale***
Royal Bank ofCanada**
GoldmanSachs
CET1 ratio Tier 1 Leverage ratio Median CET1 ratio (12.7%) Median leverage ratio (5.2%)
Note: Tier 1 leverage ratios for UBS and Credit Suisse reflect CET1 plus low-trigger Additional Tier 1 (AT1) and high-trigger AT1 securities.*data as of 30 September 2017; **data as of 31 October 2017; ***For Deutsche Bank, the figures include the effects from the implementation of IFRS 9 effective 1 January 2018 as well asirrevocable payment commitments (20 bps); IFRS 9 for BNP Paribas (10bps) and for Société Générale (15 bps).Source: Companies' results presentations and financials, Moody's Investors Service
Detailed considerationsOperating expenses continued their downward path, and the burden from the Strategic Restructuring Unit (SRU) is easingCredit Suisse achieved another CHF254 million of net cost savings versus Q4 2016, resulting in the lowest fourth-quarter expensessince 2014 (see Exhibit 2). However, on a quarter-on-quarter basis at group level, adjusted operating expenses increased 7% whilerevenues only increased 5%, indicating that further cost reductions will remain key to meet communicated medium-term targets8.
Operating expenses were lower in the Swiss Universal bank segment (SUB; -11%) and in Asia Pacific (APAC; -7%). In the Global Markets(GM), Investment Banking and & Capital Markets (IBCM) and International Wealth Management (IWM) divisions, however, costsstarted to slightly grow again, reflecting investments into business growth and seasonal pay patterns. As a result of weak revenuegeneration, operating leverage for the quarter was negative in GM and IBCM. However, in SUB and Asia Pacific Markets, cost reductionshelped offset revenue declines on an absolute basis; and the IWM and Asia Pacific Wealth Management & Connected segmentsbenefitted significantly from improved operating leverage.
Note: CS total adjusted operating expenses, excluding restructuring and litigation expensesSource: Company financials, Moody's Investors Service
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 onwww.moodys.com for the most updated credit rating action information and rating history.
2 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
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Owing to the uncertain outlook on revenues, we believe it will become more cumbersome maintaining a sizeable positive absolute gapbetween revenue and cost developments, despite the visible success of CS's large-scale restructuring and capital reallocation programentering its final year in 2018. From 2019 onward, we anticipate the group’s profitability to increasingly benefit from the reduced costsof off-loading non-core assets, lower funding costs as more expensive legacy capital instruments are redeemed and replaced withlower-cost funding, and the absence of meaningful restructuring costs (see Exhibit 3). CS expects the Strategic Restructuring Unit(SRU) to be less of a drag in 2019 once the remainder of the unit is re-integrated into the divisions. CS forecasts that the segment willproduce a $500 million pre-tax loss during 2019, down significantly from CHF1.85 billion in 2017 and an estimated CHF1.4 billion in2018.
Exhibit 3
Credit Suisse Group’s de-risking and restructuring progress will support profitability
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
2016 2017 2018E 2019E 2020E
SUB IWM APAC GM IBCM SRU CC Total pretax profit
SUB = Swiss Universal Bank, IWM = International Wealth Management, APAC = Asia Pacific, WM&C = Wealth Management and Connected, GM = Global Markets, IBCM = InvestmentBanking and Capital Markets, SRU = Strategic Resolution Unit, CC = Corporate Center.Sources: Credit Suisse Group and Moody’s Investors Service estimates
Solid liquidity profile and stable business mixCS's sound liquidity profile remained unchanged during the quarter. CS reported a regulatory Liquidity Coverage Ratio (LCR) of 185%,up from 181% in Q3 2017. The LCR therefore continued to stand well above the required regulatory minimum of 110%. Within thebusiness segments, pre-tax profit composition changed slightly (see Exhibit 4), with higher IWM and IBCM pre-tax profits partiallycompensating for losses in GM.
Exhibit 4
Credit Suisse Group's adjusted profit before tax by segment
*SUB: Swiss Universal Bank, IWM: International Wealth Management, APAC: Asia Pacific, GM: Global Markets; IBCM: Investment Banking and Capital Markets, SRU: Strategic ResolutionUnit, CC: Corporate Center.Source: Company results presentations and financials, Moody's Investors Service
3 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
CS's wealth and asset management businesses benefitted from positive, although considerably slowing, net new money inflows (seeExhibit 5) as well as a solid market performance, supporting divisional revenues. During Q4 2017, CS's wealth and asset managementbusinesses combined recorded net new money inflows of CHF5.2 billion. Invested assets in IWM and Asia Pacific Private Bankingreached their highest levels since 2013, supporting future recurring revenue generation.
WM - Switzerland WM - Asia Pacific WM - International AM - International NNA - Swiss CIB Total
Note: excluding Strategic Resolution Unit and not adjusted for assets managed across businesses (double-counting). WM: Wealth Management (Private Banking), AM: Asset Management,Swiss CIB: Swiss Corporate and Institutional BankingSource: Company financials, Moody's Investors Service
Segmental results commentarySwiss Universal Bank (SUB) reported adjusted pre-tax profits of CHF438 million, up 16% year-over-year. Credit loss expensesdeclined by CHF19 million versus the prior-year quarter, supporting results. With adjusted revenues down 4% year-over-year, webelieve this underlines the challenging operating environment in Switzerland, characterised by very low and (in part) negative interestrates and subdued client activity. In spite of these challenges, SUB managed to improve its year-over-year pre-tax profit, stronglysupported by an 11% decrease in adjusted operating expenses. Assets under management (AuM) across SUB increased slightly duringthe quarter to CHF563 billion, largely reflective of strong market performance.
International Wealth Management (IWM) reported adjusted pre-tax profits of CHF410 million for the quarter, up 37% from a yearago. Within IWM, Private Banking adjusted pre-tax income in the quarter was up 43% to CHF275 million, with a particularly positivecontribution from transaction and performance based revenues. The resulting revenue growth in the segment (+12%) clearly offset onlyslightly higher operating expenses (+3%).
IWM saw solid net new asset (NNA) inflows of CHF4.1 billion during the quarter and maintained the gross margin at 101 basis points(bps) in Private Banking. With record invested assets of CHF367 billion in Private Banking and CHF386 billion in Asset Management,future fee generation will support recurring fee revenues.
Asia Pacific (APAC) reported adjusted pre-tax profits of CHF199 million in the quarter, up 63% year-over-year. Another weakperformance in APAC Markets undergoing continued reshuffling and re-alignment more than overshadowed significantly improvedresults in APAC Wealth Management and Connected (WM&C). The decline in APAC Markets was driven primarily by a continueddecline in fixed income sales and trading revenues (-28%) – reflecting lower revenues from emerging market rates and in structuredproducts – and a decline in equity sales and trading revenues (-13%). Operating expenses in APAC Markets declined by 14%, in-linewith the year-over-year decline in total net revenues, but were unable to offset in full the absolute decline in the sub-segment'srevenue base.
APAC WM&C on the other hand reported another solid quarterly performance with adjusted pre-tax profits up 43% to CHF820million, as significantly higher year-over-year transaction-based revenues (+18%) and recurring commissions and fees (+19%) morethan offset the decline in net interest income (-11%) amid stable operating expenses (-1%). The results included a gain of CHF64million from an investment into a Vietnamese company, where CS invested alongside its wealth management clients prior to the initialpublic offering of the entity.
4 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Global Markets (GM) reported a pre-tax loss of CHF116 million in Q4 2017, down from a small gain of CHF20 million in Q4 2016.Net revenues declined 8% while operating expenses rose 2%. Within the business, lower revenues from equity income sales andtrading (-27% year-over-year) could not be offset by strong underwriting (+30%). Fixed income sales and trading revenues held up well(-3%), outperforming its global peers9. CS's fixed income business benefitted from continued strength in securitized products revenuesdriven by significantly higher asset finance results, largely offsetting weaknesses in leveraged finance trading activity, macro productsrevenues as well as emerging markets revenues.
RWAs rose in the quarter (to CHF59 billion from CHF56 billion in Q3 2017), reflecting higher underwriting exposures and certainmethodology changes. Global Markets continues to operate at its leverage exposure cap ($290 billion), and its $60 billion RWA ceiling.It will therefore remain paramount to grow revenues without additional risk taking in GM, and to show that the division can be keptprofitable on a sustained basis.
Investment Banking and Capital Markets (IBCM) reported adjusted pre-tax income of CHF121 million, a decline of 15% relativeto the prior year. The decline was driven by higher operating expenses (+3%) owing to continued investments into IT, compliance andregulation. At the same time, revenues declined 2% year-over-year, as lower advisory fees (-23%) could only be partly offset by higherdebt underwriting revenues (+9%) and equity underwriting revenues (+14%).
The Strategic Resolution Unit (SRU) reported an (unadjusted) pre-tax loss of CHF455 million versus CHF2,895 million in Q4 2016.CS continued reducing its non-core exposures, recording a CHF2 billion reduction (-6%) in RWAs in the quarter to CHF33.6 billionas well as a corresponding CHF5.5 billion reduction in leverage exposures (-8%) to CHF59.9 billion. We see CS well on track to meetits RWA target of CHF30 billion (of which CHF11 billion is expected to relate to non-operational risks) by year-end 2018 when theremaining SRU portfolio is expected to be folded back into the core businesses. The Corporate Centre reported a pre-tax loss ofCHF136 million in the quarter relative to a loss of CHF271 million in the in the same period last year.
5 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Moody's related publicationsCredit Opinion» Credit Suisse Group AG, November 2017
Issuer Comment» Credit Suisse’s de-risking and cost-cutting progress will support profitability, December 2017
» Q3 2017 results: Cost control and lower non-core losses help offset slowing revenues, November 2017
Issuer In-Depth» Global Investment Banks - 2018 Outlook, December 2017
» Global Investment Banks: Peer group continues to exhibit low investment-grade credit strength, December 2017
» Global Investment Banks - Europe: Q3 2017 Update: Profits benefit from lower one-offs and higher non-capital markets revenues,November 2017
» Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS; Risks from remaining legacy assets will continue to weigh onstandalone credit profiles, September 2017
» Global Investment Banks - Europe: Q2 2017 Update: Less volatile capital markets crimp profits for Europe's global investment banks,August 2017
» Global Investment Banks: Legacy litigation risks recede, July 2017
» Global Investment Banks: Indicators of Capital Markets Risk for the Moody’s GIB Peer Group, June 2017
» Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS: De-risking Will Slow with Heightened Market Uncertainty,October 2016
» Brexit-related Costs and Uncertainties Pose Fresh Challenge to Non-UK GIBS’ Pan European Business Models, July 2016
» Credit Suisse and UBS: Swiss TLAC Regulation Drives Issuance of Loss-Absorbing Debt, Increasing Protection for Senior Creditors,December 2016
Rating Action» Moody's upgrades Credit Suisse Group's long-term rating to (P)Baa2 from (P)Baa3; Credit Suisse AG's long-term debt rating upgradedto A1, outlook stable, December 2016
Rating Methodology» Banks, September 2017
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.
6 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
Endnotes1 All figures in this report relate to Q4 2017 and comparisons are made to Q4 2016, unless otherwise indicated.
2 The rating shown is Credit Suisse Group AG's long-term senior unsecured debt rating and outlook.
3 The ratings shown are Credit Suisse AG's long-term deposit rating and outlook, its long-term senior unsecured debt rating and outlook and its BaselineCredit Assessment (BCA).
4 Unless indicated otherwise, figures displayed in this report are on a Credit Suisse Group AG adjusted basis. Our adjustments do not take into accountrestructuring and litigation expenses whereas Credit Suisse’s adjusted figures take out restructuring and major litigation expenses.
5 RWAs = Risk-weighted assets; RWA increases reflect an updated loss history and a revised methodology for the measurement of RWAs relating tooperational risk, primarily in respect of CS's 2017 RMBS settlement.
6 BEAT = Base erosion and anti-abuse tax, which targets US businesses benefiting from deductible payments made to non-US related parties.
7 Comparisons versus Q4 2016 are difficult because of the transfer of the systemic market making group to IWM from the Global Markets (GM) division andAsia Pacific Markets division in Q1 2017.
8 CS continues to expect a 5% year-over-year decline in 2018 total operating expenses to below CHF17 billion from CHF21.2 billion in 2015 (and CHF18.0billion in 2017), when it started its three-year restructuring program.
9 US firms' fixed income revenue decline was 33%.
7 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
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8 14 February 2018 Credit Suisse Group AG: Q4 2017: Solid wealth management and lower legacy losses largely offset weaker capital markets results
