Credit Suisse AG 'A/A-1' Ratings Affirmed On Continued Strong Capital Buffers; Outlook Stable
Additionally, we affirmed our issue credit ratings on the hybrid capital instruments issued by Credit Suisse as well as the ICRs on the group's core subsidiaries.
The affirmation follows our regular surveillance review of Credit Suisse and reflects our view that the group will be able to preserve strong capitalization and a sound franchise of stable businesses despite unfavorable operating conditions. Ultra-low interest rates and generally subdued client trading activity may persist for the foreseeable future, although market conditions may recover somewhat from the weak first quarter of 2016. These pressures add to the challenges and implementation costs of Credit Suisse's business restructuring, which was first announced Oct. 21, 2015, and updated on March 23, 2016.
However, we continue to consider capitalization to be one of Credit Suisse's strengths. We project that its risk-adjusted capital (RAC) ratio will remain within 11.5%-12.0% over the next 18-24 months, with 2016 being the most critical phase of its restructuring. The ratio stood at 12% at year-end 2015, which is less than the 12.5%-13.0% we projected previously, but still materially above the 10% threshold for us to considering capitalization strong. This is markedly higher than that of most large universal banking peers in Europe. It provides a buffer to absorb additional unexpected charges, such as higher litigation costs or expense related to the wind-down of noncore operations. Further, we believe that Credit Suisse would have the capacity to preserve its strong capital position by adjusting its dividend policy, as appropriate, or conduct additional asset sales.
In addition, we note that Credit Suisse's core equity Tier 1 (CET1) ratio and its Tier 1 capital ratio are already close to meeting future regulatory requirements under Swiss too-big-to-fail regulations. For example, by 2020, Credit Suisse's CET1 will need to amount to at least 10% of risk-weighted assets (RWA) or 3.5% of leverage exposure (excluding a potential add-on for the countercyclical buffer). As of March 31, 2016, these ratios were at 11.4% and 3.3%, respectively, on a look-through basis. We note that additional capital constraints might occur in 2019-2020 when the Basel Committee's RWA reforms are due to be implemented. Credit Suisse's 2018 target CET1 ratio of 13% reflects these potential additional requirements, which it aims to achieve as its restructuring measures take effect. The scope and timing of the RWA reforms remain highly uncertain and an easing of the ultimate requirements would benefit Credit Suisse's transition process.
We also continue to believe that the revised strategy could improve Credit Suisse's overall creditworthiness over time, even if running down some illiquid portfolios in a weak market environment could pressure earnings in the short term. Moreover, we believe that Credit Suisse's sound global franchise in wealth management and its strong position in corporate and retail banking in Switzerland are stabilizing factors in our assessment of the group's business position. Although the profitability of these businesses also suffers from low interest rates, they provide a source of fairly reliable and low-risk revenues. The revised strategy aims to strengthen these businesses in addition to the group's presence in Asia-Pacific at the expense of riskier trading activities. We believe the extent of business model adjustments are manageable and Credit Suisse's capital strength (both in terms of core equity and bail-inable instruments) could help the bank, in our view, to navigate weak market conditions.
The U. K.'s recent vote to leave the EU (Brexit) does not materially affect our assessment of Credit Suisse's profitability prospects. If the U. K. were to lose access to the EU financial services passporting arrangement, Credit Suisse may need to relocate some activities from its London-based subsidiaries to other bank subsidiaries within the EU. However, we see a bigger impact from the event potentially prolonging the current period of ultra-low global interest rates and depressed business volumes.
In our long-term ratings on Credit Suisse AG and its core subsidiaries, we continue to add one notch of uplift for additional loss-absorbing capacity (ALAC), reflecting the sizeable buffers of bail-inable gone-concern capital instruments. At the latest year-end 2015 disclosure date of regulatory Pillar 3 information, ALAC eligible instruments were 8.3% of S&P Global Ratings RWAs. For Credit Suisse, we apply 5.25% and 8.5% thresholds for one or two notches uplift, respectively. The ALAC uplift does not benefit Credit Suisse Group AG. This is because we anticipate that bail-inable senior unsecured obligations issued or guaranteed by Credit Suisse Group AG will make up the majority of the group's gone-concern capital that might be written down or converted into equity in a resolution scenario.
The stable outlook on Credit Suisse and Credit Suisse Group AG reflect the ongoing initiatives to preserve capital and allocate resources to less risky business lines. We believe that there is a low likelihood that the group's RAC ratio would fall below 10% for a prolonged period. Furthermore, we believe that the group's franchises in global wealth management and domestic corporate and retail banking should remain resilient to potential negative headlines and staff detraction as the group implements its strategy this year and next.
In addition, for Credit Suisse and its core operating subsidiaries, the stable outlook also reflects the substantial and increasing buffer of bail-inable gone-concern capital. Credit Suisse has continued to issue additional gone-concern capital during the first half of 2016, and we expect they will make further issuances in the second half of 2016, and the following years. This provides stability to the group credit profile (GCP) in case its capital or franchise stability develop more negatively than we anticipate. Conversely, while we could raise the ratings on the Credit Suisse, if the group builds its ALAC ratio sustainably beyond 8.5%, the stable outlook reflects that upside pressure would also depend on a comparison of our ICR on the bank with global peers. It also would depend on confirmation that the new business model is well-funded and well-positioned for the regulatory and economic environment, allowing it to generate strong and stable earnings over the cycle.
We could raise the ratings on Credit Suisse AG, if ALAC buffers were in place and our concerns about the business model and peer comparisons were satisfied.
We could lower the ratings on Credit Suisse, Credit Suisse Group AG, and the hybrid debt instruments issued by group entities, if we revised down the unsupported GCP, for example, if a substantial increase in unexpected losses pushed the RAC ratio below 10% on a prolonged basis. We could also lower the ratings if we see a higher risk that its global diversified franchise erodes sustainably, for example, as a result of material unexpected set-backs in the group's restructuring process. As mentioned before, the potential for a negative rating action is more likely for Credit Suisse Group AG and subordinated debt instruments than for the ICR on Credit Suisse and our issue ratings on its senior unsecured debt, given that these ratings do not benefit from ALAC support.
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