Standard & Poor’s Ratings Services said that its ratings and outlook on Credit Suisse Group (A+/Positive/A-1), Credit Suisse (AA-/Positive/A-1+), and related entities were unaffected by the announcement of weaker earnings in the third quarter. Credit Suisse Group’s pretax earnings of Swiss francs (CHF) 1.3 billion for the quarter were down 69% year on year and 30% quarter on quarter, mainly as a result of write-downs on leveraged finance commitments, CDOs, residential mortgages, and CMBS, as well as losses in proprietary equity trading.
While the investment bank was only breakeven for the quarter, this is not significantly out of line with the industry and better than some competitors. An improvement in the fourth quarter is likely, although market liquidity remains fragile. Valuations of some structured credit instruments are still volatile, but Credit Suisse does not appear to have the same magnitude of exposure to such securities as do UBS AG (AA/Stable/A-1+) and Merrill Lynch & Co. Inc. (A+/Negative/A-1), and has stated that net risk exposures to subprime mortgages and CDOs are “de minimis”. Leveraged finance commitments, however, are large at CHF60 billion ($52 billion) at Sept. 30, 2007, and although we consider further markdowns are unlikely given the more recent rally in prices, the market remains fragile and susceptible to shocks. In addition, Credit Suisse still has material exposure to Structured Investment Vehicle notes, asset-backed CP, and floating-rate notes purchased from its money market funds, the valuations of which may also be volatile. Elsewhere, a strong performance in the private bank demonstrates the benefit of the group’s diversification and helped maintain overall returns.
The positive outlook reflects the continued potential for an upgrade should the group demonstrate sustained resilience through the more difficult environment, together with continued strong performance in the private bank and improving trends in the asset manager. Failure to deliver on the integration and efficiency programs, or a worse-than-average performance through a downturn would likely prevent an upgrade and result in a stable outlook. Unexpectedly large market losses, litigation charges, or evidence of a breakdown in risk controls could result in a lower rating.
