OREANDA-NEWS. Fitch Ratings has assigned Credit Suisse (Schweiz) AG (CS Schweiz) an expected Long-Term Issuer Default Rating (IDR) of 'A(EXP)', expected Short-Term IDR of 'F1(EXP)', expected Viability Rating (VR) of 'a(EXP)' and expected Support Rating of '1(EXP)'. The Outlook on the expected Long-Term IDR is Stable. CS Schweiz is Credit Suisse AG's (CS) domestic banking subsidiary, which we expect to become operational in 4Q16.

We last reviewed Credit Suisse Group's (CSG; A-/Stable/a-) and CS's (A/Stable/a-) ratings on 24 May 2016 (see 'Fitch Downgrades Credit Suisse Group to 'A-'; Affirms Credit Suisse AG', at www. fitchratings. com) and they are unaffected by this rating action.

CS Schweiz will initially be a wholly-owned subsidiary of the group's main operating bank, CS, and will largely house the business in the Swiss Universal Bank division. The group plans to sell a stake in CS Schweiz through an initial public offering of up to 30% by end-2017, subject to obtaining all required approvals.

CS Schweiz forms part of a broader legal entity programme announced by Credit Suisse in late 2013, which aims to improve the recoverability and resolvability of large banking groups. Domestic legislation requires the two largest Swiss banks to have a "credible and workable" emergency plan to allow for an orderly resolution of the group while maintaining systemically important functions in the event of a crisis, including domestic operations.

In Switzerland, the ultimate design and implementation of the emergency plan is the responsibility of the banks, with final approval from the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB). Because the regulators do not take a prescriptive approach to ring-fencing, CS Schweiz could maintain large unsecured exposures to its parent. Therefore, we expect the credit profiles of CS Schweiz and CS to remain closely correlated.

CS Schweiz was entered into the commercial register in April 2015. Subject to obtaining relevant banking licences and novating counterparty agreements, we expect to assign final ratings to the entity once the bank has become operational.

KEY RATING DRIVERS

IDRs AND VR

CS Schweiz's expected IDRs are in line with CS's. CS Schweiz will comprise the bulk of the group's domestic corporate, retail and private banking activities. The expected VR (one notch above CS's) drives the expected IDRs and benefits from the entity's low risk domestic loan book, moderate volumes of trading assets, our expectation of sound capitalisation and its strong deposit franchise.

The expected VR factors in significant concentration risk from CS Schweiz's exposure to CS, as a result of the group's central treasury approach, which envisages that the main operating subsidiaries deposit the bulk of their excess liquidity with the parent bank. This effectively caps CS Schweiz's expected VR at the level of CS's Long-Term IDR to reflect the inherent risks in deposits with the parent.

CS Schweiz's focus on domestic corporate and private banking should enable it to generate resilient earnings. While short-term profitability will be affected by costs of setting up CS Schweiz, we expect operating profit in the medium term to benefit from cost rationalisation measures. The performance of CS's Swiss Universal Bank division supports our view that earnings should be relatively stable, also when compared with CS.

Risk management for CS Schweiz will be incorporated into the wider group's risk management framework, and we expect underwriting standards in domestic retail lending to remain sound. Impaired loans in the Swiss Universal Bank accounted for a low 0.5% of gross loans at end-2015. Low loan-to-value ratios in real estate lending mitigate tail risks of a correction in Swiss real estate prices, and we expect CS Schweiz to continue managing loan growth prudently. We expect market risk to be manageable and arise principally from structural interest rate exposure, but also from some client-driven trading positions initially booked in CS Schweiz.

We expect CS Schweiz's capitalisation to be sound, with solid buffers over regulatory requirements, and capital targets to be aligned with those of the consolidated group. The substantial amount of the qualifying junior debt buffer available at the group level does not currently result in an uplift of CS Schweiz's Long-Term IDR above its VR. This reflects our view that in a resolution scenario, a sizeable proportion of existing gone concern capital could be required to support foreign entities with more clearly defined internal TLAC pre-placement requirements.

CS Schweiz's sound funding position will be underpinned by a strong deposit base. We expect the bank to be a net supplier of liquidity to the rest of the group, but it will benefit from access to funding and liquidity from the rest of the group, in case of need, via CS's central treasury function.

SUPPORT RATING

CS Schweiz's expected Support Rating of '1(EXP)' is driven by our view that the entity will be an integral part of the Credit Suisse group, as the Swiss Universal Bank currently is. A default of CS Schweiz would in our view constitute huge reputational risk to its parent, thus increasing CS's propensity to provide extraordinary support if required.

While CS Schweiz will make up a significant part of the group's total assets and equity, we believe it would be unlikely that the Swiss regulator would impose significant restrictions on recapitalising CS Schweiz from the rest of the group or upstreaming capital from its other subsidiaries where available. CS Schweiz's significant relative size is further mitigated by our view that its need for support is unlikely to arise simultaneously to that of other foreign subsidiaries.

RATING SENSITIVITIES

IDRs AND VR

The Stable Outlook on CS Schweiz's expected Long-Term IDR reflects the Stable Outlook on CS's Long-Term IDR, which caps the VR, and our expectation that CS Schweiz will maintain solid financial metrics. An upgrade of CS Schweiz's expected VR would require a track record of strong and stable earnings and solid capitalisation, as well as removing the effective cap of CS's Long-Term IDR. The latter could be achieved by either an upgrade of CS's Long-Term IDR or a change in regulatory requirements that would impose specific limits on uncollateralised exposures to other Credit Suisse entities, thus strengthening the 'ring-fence'.

CS Schweiz's expected VR, and consequently IDRs, could come under pressure if its capitalisation, asset quality or earnings stability are weaker than we currently expect. Given the significant exposure to CS through the group's central treasury approach, a downgrade of CS's Long-Term IDR would also put pressure on CS Schweiz's VR.

The Long-Term IDR could be rated above the VR if we believe that buffers of qualifying junior debt and internal TLAC pre-positioned at the CS Schweiz level are sufficiently large to result in a significantly lower risk of default on CS Schweiz's senior obligations than the risk of the bank needing to impose losses on junior debt and pre-positioned TLAC to restore CS Schweiz's viability. This IDR uplift would be limited to one notch and would also be contingent on greater clarity on the permanence at CS Schweiz level of such buffers, which could arise for example as a result of explicit and sufficiently large internal TLAC requirements for CS Schweiz.

SUPPORT RATING

The expected Support Rating is sensitive to changes in our assessment of CS's ability to provide extraordinary support to CS Schweiz. The Support Rating could also be changed in the unlikely event that we concluded that CS Schweiz is no longer core to the rest of the group or we believed fungibility of capital within the group to be severely constrained.