Moody's Investors Service, the rating services arm of Moody's Corporation MCO, recently downgraded the long-term ratings of Credit Suisse Group AG CS and affiliates. Notably, the company’s senior unsecured rating was cut to A2 from A1 and long-term deposit rating was lowered to A1 from Aa3; while the rating on its baseline credit assessment or "BCA" dropped to Baa3 from Baa2.
Notably, the agency had commenced its review for a possible rating downgrade for Credit Suisse in Oct 2015, after the company unveiled its new strategic plan to restructure and reorganize business operations.
Why the Downgrade?
According to Moody’s, Credit Suisse’s plan-driven expenses are anticipated to outweigh benefits of the expected cost savings and higher revenues (also driven by the strategic plan), thereby challenging its profitability over the next two years.
Notably, the above-mentioned strategic plan calls for overall restructuring of the company’s operations, including increased investment to fund growth initiatives and winding down of its non-strategic business lines.
Additionally, it highlights the company’s focus on substantially growing its Asia Pacific and International Wealth Management businesses in the near term. Based on an expectation that the company will not adopt a higher level of risk management for this expansion, Moody’s anticipates a potential rise in risks for the company’s creditors.
Further, while the company’s efforts to provide large capital buffers, compliant with Too Big To Fail (TBTF) and the Financial Stability Board's Total Loss Absorbing Capital (TLAC) norms, are expected to benefit senior creditors at Credit Suisse, such buffer is unlikely to “reduce the likely loss-given-failure for bank and holding company senior creditors” as per Moody's Advanced Loss Given Failure (LGF) analysis. However, it will likely mitigate the adverse impact of reduced BCA rating.
Nonetheless, the agency noted that sustainable accomplishment of the 2018 targets can result in improved profitability for Credit Suisse, and help it win a ratings upgrade.
Separately, Moody’s affirmed its stable outlook for the company as a whole.
Credit Suisse currently holds a Zacks Rank #4 (Sell).
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