Banks. Credit Suisse Group AG. Switzerland. Full Rating Report. Key Rating Drivers. Rating Sensitivities. Ratings

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1 Switzerland Full Rating Report Ratings Long-Term IDR A- Short-Term IDR F2 Viability Rating a- Support Rating 5 Support Rating Floor NF Credit Suisse AG Long-Term IDR Short-Term IDR A F1 Viability Rating a- Support Rating 5 Support Rating Floor NF Derivative Counterparty Rating A(dcr) Credit Suisse (Schweiz) AG Long-Term IDR Short-Term IDR Viability Rating A F1 Support Rating 1 Derivative Counterparty Rating A(dcr) Credit Suisse International Credit Suisse (USA) Inc. Long-Term IDR A- Short-Term IDR F1 Support Rating 1 Derivative Counterparty Rating: A-(dcr) Credit Suisse International Outlooks Long-Term IDRs: Credit Suisse Group AG, Credit Suisse AG, Credit Suisse International, Credit Suisse (Schweiz) AG Long-Term IDR: Credit Suisse (USA) Inc. Financial Data 30 Sep 17 a Stable Positive 31 Dec 16 Total assets (USDbn) Total assets (CHFbn) Total equity (CHFbn) Operating profit (CHFm) 1,700-2,632 Published net income 1,145-2,707 (CHFm) Operating profit/riskweighted assets (%) Impaired loans/gross loans (%) Fitch Core Capital/RWAs (%) Fully applied Basel III CET1 ratio (%) Internal capital generation (%) Related Research - Ratings Navigator (October 2017) Analysts Claudia Nelson claudia.nelson@fitchratings.com Luis Garrido, CFA luis.garrido@fitchratings.com Key Rating Drivers Leading Wealth Manager: (CSGAG) and Credit Suisse AG s (Credit Suisse) Viability Ratings (VRs) reflect the group s sound franchise as a leading global wealth manager with material investment banking capabilities. Private banking is well-diversified geographically, while international growth in assets under management and loans since 3Q15 has outpaced that of Switzerland-domiciled wealth management. CSGAG has the secondlargest universal banking presence in Switzerland, which generates resilient profitability. Material Investment Bank: The high proportion of trading, underwriting and advisory revenue (45% of the operating divisions revenue in 9M17) exposes the group to volatility and cyclicality and constrains CSGAG s company profile. The group has a particularly strong focus on fixedincome instruments, in particular in leveraged finance and credit, where activity can be cyclical. Depressed Earnings to Improve: We expect the group s subdued profitability to improve as losses from the Strategic Resolution Unit (SRU) narrow, non-core assets are reduced and restructuring costs fall. The CHF2.4 billion net annual cost reduction compared with 2015 should also support earnings. Wealth management businesses have posted sound net margins on AuM, but a record of sustainable profitability for the resized Global Markets division would underpin the group s earnings generation capacity. Sound Capitalisation: CSGAG s capital ratios compare well with global trading and universal bank (GTUB) peers following a CHF4.1 billion rights issue in 2Q17 and exceed the group s 2020 going-concern total capital requirements. Litigation risks have receded following the RMBS settlement. The small size of the capital base in absolute terms in relation to sizeable investment banking activities makes the bank more vulnerable to external shocks than peers. Strong Asset Quality: Asset quality benefits from a sizeable low-risk domestic residential mortgage portfolio and well-controlled higher-risk exposures. These include underwriting, leveraged finance, and wealth-management shipping and aviation portfolios. Fitch Ratings expects sound underwriting standards should help the bank implement its growth strategy in Asia Pacific while avoiding undue asset risk. Buffers Protect Senior Creditors: Credit Suisse s Long-Term Issuer Default Rating (IDR) is one notch above its VR because the buffer of qualifying junior debt and TLAC-eligible senior holding company senior debt is sufficiently large to recapitalise the bank after a resolution without imposing losses on senior creditors. Sound Funding and Liquidity: Wealth management, retail and commercial banking contribute to a well-established and diversified deposit base, as well as material exposure to wholesale funding, which is diversified and adequately managed. Liquid assets constitute a sizeable portion of the balance sheet and liquidity is well-managed across legal entities. Rating Sensitivities Improved Earnings, Risk Reduction: Upside to the ratings could arise as the restructuring progresses and if there are continued cost and non-core asset reductions bringing profitability in line with the group s underlying capacity, with unchanged capitalisation and risk appetite. Execution Slippage, APAC: Significant deviation from cost and non-core asset reduction targets, or greater-than-expected asset risk from international wealth management growth, would put pressure on the VR. 14

2 Gross Credit Exposure By geography, end-2016 Inner ring: Including guarantees and commitments (a further CHF171bn) Outer ring: Loans and other assets (CHF461bn) Switzerland EMEA 8% 22% 25% Asia Pacific Americas 19% 43% 45% 29% 9% Real GDP Growth Forecasts Selected geographies Switzerland China Brazil (%) avg. Source: Fitch US South Korea e 2018e 2019e Core Earnings by Activity 12 months to September 2017 Inner ring: Pre-tax profit Outer ring: Revenue Investment banking (44%) Private banking (39%) Corporate banking (10%) Asset management (7%) 7% 10% 39% 7% 18% 25% 50% 44% Core earnings exclude the corporate centre and the Strategic Resolution Unit Related Criteria Global Bank Rating Criteria (November 2016) Global Non-Bank Financial Institutions Rating Criteria (March 2017) Operating Environment Switzerland Drives Assessment; Material Emerging Markets Exposure Credit Suisse is domiciled in Switzerland (AAA/Stable), the hub for its domestic corporate and retail and global wealth management operations. We expect the Swiss economy to be resilient, underpinned by a positive labour market outlook and subdued price growth, which should boost consumer purchasing power, and recovering external demand. The bulk of investment banking operations are conducted out of entities based in the US and the UK, largely with international corporate and institutional clients. Macroeconomic developments across various geographies, as well as client sentiment, therefore affect its operations. The bank s strategy is to capture higher growth rates of wealth creation internationally, notably in Asia Pacific, where credit exposure in the region is material. Group revenue is also susceptible to changes in the economic environment affecting wealthy clients, in particular in China, Singapore and Indonesia, but also in Brazil, Russia and Latin America, where the bank has significant operations. We expect Credit Suisse to continue selectively adjusting its exposures to emerging market economies with greater tail risks, including in Brazil. Together with country diversification, this should alleviate the impact of idiosyncratic shocks. The group s main countries of operations include very advanced financial markets with a high degree of transparency, as well as developed and concentrated banking sectors. The Swiss franc s status as a global reserve currency partly mitigates the country s small size, which constrains capital market depth. Credit Suisse maintains good access to capital markets globally, where it obtains funding and is active in trading. Proactive and Stringent Regulatory Oversight As a systemically important bank headquartered in Switzerland, Credit Suisse is subject to regulatory regimes across multiple jurisdictions, including the US and the UK. Recent legislative developments in Switzerland aimed to ensure that even large banks can be resolved without government intervention, which will partly depend on international resolution authorities cooperation. We view the regulatory framework in Switzerland as among the more advanced internationally. In July 2016, the Swiss Capital Adequacy Ordinance was revised to set more stringent goingconcern capital requirements of 14.3% of risk-weighted assets (RWAs) and 5% of leverage exposure, in addition to identical gone-concern capital requirements. Only high-trigger additional Tier 1 (AT1) capital instruments will be granted going-concern recognition from 1 January 2020, subject to grandfathering provisions. Large banks in Switzerland have adapted their organisational structure to make it more resolvable. Service companies and critical domestic operations are now housed in separate legal entities, aiming to ensure that critical functions are maintained in a resolution. Company Profile Credit Suisse is one of the world s largest wealth managers with material investment banking capabilities and has the second-largest universal banking presence in Switzerland. Nonetheless, we consider that the large proportion of revenue that Credit Suisse derives from capital market activities, which inherently depend on changing market conditions, contributes to earnings volatility and limits the upside to the group s VR. Underwriting and advisory (about 17% of the operating divisions revenue in the 12 months to end-september 2017), fixedincome trading (about 14%) and equities trading (about 13%) together accounted for 44% of group revenue in the period. Since October 2015, when the group s current strategy was set out, the group includes wealth management operations across three divisions: Swiss Universal Bank (SUB) for Switzerlanddomiciled clients, APAC for clients in Asia Pacific and International Wealth Management (IWM), which includes global asset management and international private banking clients outside 2

3 Switzerland and Asia Pacific. Sales and trading are booked primarily in the Global Markets (GM) division, but also in APAC. Underwriting and advisory revenue is mainly included in IBCM but also in GM and APAC. About half of the group s RWA and leverage exposure is consumed by SUB, IWM and APAC, largely by the non-wealth management activities in these divisions. Adjusted Pre-Tax Profit by Division 12 months to September 2017 APAC 14% GM 14% IBCM 9% IWM 27% SUB 36% Capital Consumption End-3Q17 SUB IWM APAC GM IBCM CC SRU 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% SUB: Swiss Universal Bank, IWM: International Wealth Management; APAC: Asia Pacific; GM: Global Markets; IBCM: Investment Banking & Capital Markets; CC: Corporate Centre; SRU: Strategic Resolution Unit. Adjusted pre-tax profit shown for core divisions (excluding CC and SRU), excluding non-recurring gains on sale. Source: Credit Suisse, adapted by Fitch RWA Leverage exposure Private Banking AuM Across three divisions (CHFbn) APAC private bank SUB private clients IWM private bank 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q Strong Wealth Management Franchise; Focus on International Growth With CHF751 billion private banking assets under management (AuM) at end-3q17, Credit Suisse is the world s fourth-largest wealth manager after UBS Group AG (A+/Stable), Bank of America Corporation (A/Stable) and Morgan Stanley (A/Stable). Asset-management AuM are a further CHF376 billion. Wealth management businesses benefit from their diversified and established franchise, generating a significant proportion of fee income (29% in 9M17) but also relying on net interest income (46% of private banking revenue in 9M17), mainly from Lombard loans but also mortgage and specialty lending. The bulk of private banking AuM is from clients based outside Switzerland. Reflecting both the group s growth strategy and diverging trends of wealth creation, AuM in APAC and IWM have risen by 23% and 26%, respectively, since end-2015, compared with 9% for SUB. This was accompanied by loan growth rates similar to those of AuM in IWM, while private banking loans in APAC were at end-3q17 at the same level as end AuM outflows caused by client tax regularisation have mainly affected SUB, which has generated CHF4.8 billion net new assets since end-2015, compared with CHF29 billion for each of APAC and IWM. We expect regularisation outflows to slow in developed markets, but further tax amnesties in emerging markets cannot be excluded, as seen in Latin America in late Profitable Retail and Corporate Swiss Business Credit Suisse has a strong market share in domestic deposits and residential mortgages, underpinning its position in domestic retail and corporate banking. According to the Swiss National Bank, Credit Suisse and the slightly larger UBS together accounted for 28% of mortgages to households and 40% of customer deposits at end The group s domestic retail presence also includes a small consumer finance operation specialised in private credit and car leasing in Switzerland through its BANK-now subsidiary, a 50% stake in credit card issuer Swisscard AECS GmbH (A-/Stable) and Neue Aargauer Bank, which targets private and institutional clients in the canton of Aargau. Investment Bank Sensitive to Credit Cycle Credit Suisse s investment banking franchise strengths centre on leveraged finance and US securitisation, where the bank has leading positions, as well as a sound franchise in equities with a stronger footprint in Asia Pacific. Leveraged finance has historically also been the main contributor to underwriting and advisory revenue, but the group is investing in its mergers and acquisitions (M&A) and equity capital markets franchise to reduce this reliance and capitalise on cross-border corporate activity. 3

4 Capital market activities in Asia Pacific focus on equities trading, which generated 78% of APAC s sales and trading revenue in the 12 months to end-september Outside the APAC division, fixed-income trading generated 61% of trading revenue. Due to the bank s strong credit and leveraged finance franchise, increases in high-yield credit spreads have in the past negatively affected group trading revenue. In 1Q16, the bank exited distressed debt trading and European securitised trading to reduce earnings downside following asset mark-downs of about CHF1 billion in 4Q15 and 1Q16. We estimate these businesses generated about CHF0.5 billion in The likelihood of large mark-to-market inventory losses has in our view reduced, but the bank continues to be exposed to changes in the credit cycle. In 1Q17, Credit Suisse transferred its systematic market making group, a subset of its equities trading business that typically generates about 5% of GM revenue, to IWM, as it aims to add external capital providers through international wealth management to the business. Rapid Deleveraging in the Strategic Resolution Unit Since its inception in 4Q15, the SRU acts as a separate business division aiming to reduce assets and businesses intended to be sold or wound down. At end-3q17, it accounted for a still sizeable CHF36 billion in RWAs (14% of the group), of which just over half related to operational risk. At inception, the unit accounted for a significant 22% of group RWAs and 15% of leverage exposure. The SRU initially included non-strategic investment banking businesses (parts of the macro, credit and prime businesses) as well as certain wealth management operations (notably in the US and certain western European branches). The bank has made notable progress in reducing the SRU and aims to reintegrate the targeted CHF11 billion remaining credit and market risk RWAs into the operating divisions from 1 January Key Financial Targets and Reported Cumulative net annual cost savings (CHFbn) Basel III CET1 ratio (%) CET1 leverage ratio (%) SRU pre-tax loss (USDbn) SRU leverage exposure (USDbn) M T > > > ~ and 9M17: Reported results 2018T: Credit Suisse targets SRU pre-tax loss ex major litigation and restructuring. Cost savings compared to 2015 adjusted cost base, at constant exchange rates Legal Entity Structure Seeks to Strengthen Resolvability Credit Suisse s organisational structure reflects the group s single point of entry resolution strategy, its global operations across multiple businesses and progress over recent years in making the group more resolvable. is the top holding company of the group and holds Credit Suisse AG, the main operating bank, which consolidates substantially all of the group s assets. Credit Suisse (Schweiz) AG started operating on 20 November 2016 as a subsidiary bank of Credit Suisse AG and holds the Swiss Universal Bank s business. Since July 2017, critical service functions for the group (outside the US) have been housed in Credit Suisse Services AG, a Swiss service company. The US service company started operations on 1 January These changes have been made to ensure the continuity of critical functions in a resolution. Resolvability is one aspect taken into account by the Swiss regulator FINMA in its annual assessment of the bank s applicable capital rebate (if any). For 2018, FINMA has granted Credit Suisse about a third of the maximum rebate. The group s US intermediate holding company (IHC), Credit Suisse Holdings (USA), Inc., started operating on 1 July 2016 and is subject to enhanced prudential standards, notably on capital and liquidity. Management and Strategy Credit Suisse s strategy, set out in October 2015 and refined subsequently, includes a threeyear restructuring of the group, aiming to rapidly exit non-core businesses re-allocate resources towards international wealth management, while strengthening capitalisation and efficiency. Non-core businesses included largely investment banking activities, but also the US, Gibraltar and Monaco private banking operations. Challenging markets and weak GM performance led the bank in March 2016 to increase its targeted net cost savings target, and close the distressed debt trading and European securitised trading businesses. In December 2016, the net annual cost savings target by 2018 was further increased to CHF4.2 billion (compared to the CHF21.2 billion adjusted cost base for 2015), primarily through the reduction of non-core businesses and material staff reductions. 4

5 Credit Suisse s strategy could reduce its reliance on capital market activities while improving operational leverage and geographical diversification in wealth management. However, the strategy partly relies on investment banking client activity and a positive macroeconomic environment in Asia Pacific. In December 2016, certain divisional pre-tax profit targets for 2018 were reduced to reflect less favourable capital market conditions than anticipated. Lower expected revenue in APAC capital markets led first to a revised target of CHF1.6 billion pre-tax profit by 2018 (from CHF2.1 billion), and in November 2017 to a 10%-15% return on regulatory capital target by The pre-tax profit target for wealth management in APAC was increased in November 2017 to CHF0.85 billion from CHF0.7 billion. Targeted IWM pre-tax profit was also lowered in late 2016, to CHF1.8 billion from CHF2.1 billion. The reduction primarily related to the bank s expectation of more challenging markets for asset management within IWM. Developing the equities and M&A franchise remains a key strategic priority, as the bank aims to improve the connectivity of the investment bank to its wealth management activities and at the same time reduce the reliance on leveraged finance. This strategy would also allow it to further develop its participation in cross-border M&A activity, using its franchise with high-net-worth clients and entrepreneurs, notably in Asia Pacific. We have seen some evidence of progress, as the bank announced two of the three largest M&A deals in 1H17 and gained market share in EMEA IPOs. Through the development of formal joint-ventures between its investment banking and wealth management businesses, Credit Suisse intends to increase wealth management client penetration of structured products. Adjusted Operating Expenses Reductions ahead of schedule (CHFbn) FY15 Initial FY Oct 15 FY16 target target target 2018 target At 2015 FX rates, excluding litigation, restructuring and goodwill impairment Source: Credit Suisse SRU Risk Reduction Revised 2018 targets in reach Op risk RWA Credit & market RWA (CHFbn) Q15 2Q Q T Improved Execution; Risks Remain We believe that the bank has been fairly successful in its deleveraging and restructuring as well as in raising its targeted capital needs and taking out costs from the group. However, divisional profitability targets have yet to be met, particularly for the resized GM business (10%-15% return on regulatory capital). Despite GM s recent progress towards that target, a longer record will be required to ensure the division s smaller revenue and cost base can sustainably meet profitability targets. Furthermore, although growth in APAC has been well controlled, asset risks remain and loan book seasoning may see some potential problems arising. In terms of cost-cutting, at end-3q17, Credit Suisse had delivered CHF2.8 billion annual net cost savings (at end-2015 foreign-exchange rates) and is set to achieve its 2018 target. The group plans to operate with an operating cost base below CHF17 billion from 2018, realising 2%-3% operating efficiency savings a year, partly to fund investments in the business. Execution has also been strong at the SRU, where the bank has reduced credit and market risk RWAs by 55% since inception. The reduction incorporates the addition of USD10 billion- USD15 billion in RWAs to the unit in March 2016, related to the closure of the distressed debt and European securitised trading businesses. Leverage exposure has fallen from CHF156 billion at inception to CHF65 billion at end-3q17. We expect the proportion of illiquid and longdated assets remaining in the SRU to be now higher, which should slow the pace of deleveraging as the bank reaches its targeted CHF11 billion RWAs excluding operational risk. Credit Suisse has reduced businesses and capital consumption in its GM division. The division has stayed within its targeted exposure ceilings (USD60 billion in RWAs and USD290 billion in leverage exposure) for the past four quarters (leverage exposure at end-3q17 was slightly higher, at USD291 billion). Revenue of USD4.5 billion and adjusted costs of USD3.7 billion in 9M17 suggests progress towards reaching its targeted USD6 billion revenue and USD4.8 billion operating expenses (excluding restructuring costs) by 2018, but it has yet to deliver its targeted range of 10%-15% return on regulatory capital. 5

6 Credit Suisse s executive board has good depth and consists mostly of seasoned managers from the bank, with representation from each of the businesses. The chief executive joined the bank in mid-2015, and the chairman and chief executive roles are separate. Risk Appetite Sound Risk Management Framework; Complex Exposures Credit Suisse s risk management framework is in our view adapted for its business, which requires managing traded and illiquid instruments and material exposures to credit, market and operational risk. We believe the group s risk controls and appetite have been tightened since the mark-to-market losses in high-yield markets in 4Q15 and 1Q16, which we do not expect to recur. Credit Suisse is mainly exposed to credit risk, which accounted for 66% of Basel III RWAs at end-3q17. Underwriting standards in domestic retail lending are sound, reflected by growth below sector average, appropriate loan-to-value (LTV) policies and the good availability of collateral. The bank ensures that loans are granted on the basis of borrower affordability, assessed under stringent stressed interest rates and that they are amortised until at least 66% LTVs within 15 years. Almost the entire portfolio had LTVs below 80%, with about a third of the LTVs between 66% and 80% at end-1h17. The bank has a clearly articulated framework to rein in growth and mitigate the risks of rising vacancy rates in domestic commercial real estate (CRE), where prices are falling in some areas. Corporate banking and leveraged finance exposures can be sizeable, but risk is largely mitigated by collateral and credit default swaps. The group also has appetite for specialty lending, which includes shipping and aviation loans to wealth management clients. Risks are mitigated by comfortable over-collateralisation and monitoring, and certain exposures have been identified for wind-down. Lombard loans in wealth management are conservatively overcollateralised and remain a performing asset class, but we expect the diversification and quality of collateral could gradually deteriorate as the bank expands its franchise with certain APAC clients. Emerging market exposure is material in relation to the bank s capital, but is well managed and periodically re-assessed. Credit and market risk management are centralised for the whole group, and specialised units are responsible for geographical regions and specific products. Credit Suisse uses credit hedges and collateral to manage its credit exposure, both by individual counterparty and by portfolio. Comprehensive risk management limits by asset class and geography are reviewed annually and utilisation is managed during the year in response to market developments. The group uses economic risk capital, VaR and absolute exposure among other indicators to measure and manage risks. Stress-testing and idiosyncratic scenario analysis are wellembedded within the group s capital planning process. Operational Risk Key In line with GTUB peers active in capital market operations, the group s exposure to operational risk is material and accounted for 27% of Basel III RWAs at end-3q17. Regulatory capital requirements in respect of operational risk are measured using the advanced measurement approach (AMA), which is sensitive to bank and industry litigation developments. We believe that while litigation risk is material and has resulted in sizeable fines, it has receded following the resolution of the US RMBS case in 4Q16 (civil monetary penalty of USD2.5 billion and the agreement to provide consumer relief worth USD2.8 billion). The bank booked a CHF2.1 billion provision in 4Q16 for the entire cost of the settlement including consumer relief, which had a 90bp impact on the common equity Tier 1 (CET1) ratio. 6

7 Under US GAAP, the 4Q16 provision included the bank s estimate of the lifetime cost of relief measures, which is low because losses on RMBS positions during the crisis and volumes serviced by the bank s mortgage servicer qualify as relief measures. RWA Reallocations Change in RWA 4Q15-3Q17 (CHFbn) SRU GM CC IBCM IWM SUB APAC (37) (7) (1) Gross Loans by Division IWM and APAC grow; SRU, GM shrink (CHFbn) % Market Risk RWAs (CHFbn) 3Q17 4Q16 4Q15 GM APAC SRU IWM SUB CC IBCM Total market risk RWA Market risk/ total RWAs (%) Q15 4Q16 3Q17 +19% +20% -24% -7% -70% SUB IWM APAC GM IBCM SRU Bold: % change 4Q15-3Q17 We expect the bank will continue to be subject to litigation risk, in line with peers. We do not expect outstanding legal cases, which include several class actions in the US regarding alleged manipulation of the foreign-exchange markets and a civil suit related to the bank s role in electronic CDS markets, to result in outsized financial penalties. However, material fines that would dent capitalisation without credible plans to restore it swiftly would put pressure on ratings. Material Resource Reallocation Credit Suisse has deleveraged at group level since end-2015, as fully loaded RWAs fell by 10% to CHF267 billion between end-2015 and end-3q17. Consistent with the group s strategy to reallocate resources from non-core businesses towards its growth targets of international wealth management and APAC, exposure reductions have partly been compensated by growth in strategic businesses, which has in some cases been rapid. Sales and trading and underwriting outside of IB&CM accounted for 38% of group RWAs at end-3q17, down from 52% at end-2q15. The APAC and IWM divisions have seen the strongest loan growth in the period (20% and 19%, respectively), with the increases driven by higher balances of corporate and institutional rather than Lombard lending. Overall, the decline in GM and SRU lending exposure resulted in only a small 1% increase in gross loans at group level over the period, reaching CHF277 billion at end-3q17. Should growth in APAC and IWM result in greater than expected asset risk, this would put pressure on the group s VR. Sizeable Market Risk Exposure Given the size of capital market activities in relation to the group s capital base, we view market risk arising from the trading book as sizeable. This is balanced by a sound risk management framework. Market risk Basel III RWAs have fallen by 36% between end-4q15 and end-3q17, largely led by a 43% reduction in GM market risk RWAs. Securitised products, notably the US residential loan portfolio, along with financing in APAC, are the main drivers of traded market risk. Market risk exposure in APAC has increased since 4Q15 and at end-3q17 accounted for 28% of the group s market risk RWAs. The bank last had trading loss days in 4Q16 (two), and there were no back-testing exceptions to the VaR model in the 12 months to September In line with the bank s strategy to reduce the likelihood of losses in GM, the distribution of daily trading revenue has narrowed, with only one day in the last four quarters with trading revenue above CHF75 million. Interest-rate risk in the banking book is moderate, as a 1bp parallel upward shift in the yield curve would have increased the value of non-trading positions by CHF4.1 million at end Regulatory capital s interest-rate sensitivity to a 200bp parallel shift was significantly below the 20% threshold that would lead regulators to potentially regard interest rate risk as excessive. Given the Swiss banks repricing efforts following the introduction of negative policy rates, a shift to positive rates would erode asset margins, slightly offsetting the positive impact on deposit margins. The bank is also positively exposed to a rise in US dollar interest rates. Credit Suisse models the stability of deposits to hedge against interest-rate risk, identifying core deposits to fund assets with a three-to-four-year maturity. Equity risk in the banking book, as measured by the impact of a 10% fall in equity markets in developed countries (20% in emerging markets) on the value of the banking book, was a moderate CHF517 million at end

8 Asset Composition End-3Q17 Other assets Other Brokerage rec. 4% 5% Securities rec. as collateral 5% Cash & eq. 13% SFTs 18% Loan Split: SUB investments 1% Goodwill 1% Other 1% Loans 35% Trading assets 18% (CHFbn) End-3Q17 Mortgages 100 Lombard loans 7 Consumer finance 3 Total consumer 111 Commercial & industrial 27 Commercial real estate 23 Financial inst, govts and 5 public institutions Total corporate & 55 institutional Total 166. Figures may not add up due to rounding. Financial Profile Asset Quality Credit Suisse s loan book is generally sound thanks to the quality and stability of its domestic loans, which predominantly consist of low-risk residential real-estate mortgages. Risk is heightened by exposures to emerging markets, oil, leveraged finance and specialised loans (with private banking clients). Our assessment of asset quality also considers non-loan book exposures, the riskiest of which are generated largely by capital market activities. Low-Risk Domestic Lending Remains Resilient About 60% of the group s loan book at end-3q17 was booked at the SUB. Loans include the vast majority of the group s mortgages, as well as just under half of the group s corporate and institutional exposure. The book is of good quality with just 0.5% of gross loans classified as impaired (broadly unchanged since end-2014) and 89% of the group s mortgages being rated investment-grade according to the bank s internal ratings. A breakdown of the book is provided in the table on the left. Just under half of residential mortgages consist of single family homes, and most are fixed-rate mortgages. Almost the entire portfolio had LTVs below 80%, with about a third of the LTVs between 66% and 80%. The average LTV of CRE loans has remained stable at 46%, with 70% of the total related to offices and mixed use. Commercial lending is well-diversified by counterparties and with low levels of provisions. This remains the sector with the highest loss potential, and a sizeable share of the provisions in corporate lending in 2016 were related to the strength of the Swiss franc, which is hurting export-oriented companies. Nominal exports in most sectors have subsequently recovered, reducing the credit risk on these counterparties. Specialised Lending Drives IWM Asset Quality The IWM division, which includes just under half of the group s Lombard loan exposure as well as the speciality finance portfolio, booked a material CHF48 billion loans (17% of the group). Speciality finance includes the group s sizeable exposure to ship finance and smaller exposures to aviation finance, export finance, and Swiss and international mortgages. Shipping exposures, which relate to lending to family-owned businesses, have seen some increases in defaults and remain vulnerable, but are overall not a significant driver of the group s asset quality. All exposures are related to private banking clients. Lombard loans are geographically diversified between the Middle East, Africa, emerging Europe and Latin America, with a higher proportion in Europe. While the vast majority of Lombard loans are low risk and collateralised by a basket of diversified securities, a significant minority of loans are backed by less diversified collateral. This division saw a deterioration in the gross impaired loan ratio (end-3q17: 1.0%; end-2016: 0.7%; end-2015: 0.6%), caused by impaired exposures in ship finance, export finance exposures (collateralised by export credit exposures) and to a lesser extent aviation loans. Material Exposure to Emerging Markets APAC accounted for 16% of gross loans, generating a sizeable exposure to emerging markets, notably in China, South Korea, Brazil and India. The bank proactively monitors and adjusts exposure limits and utilisation depending on credit conditions and opportunities. About a third of the loan book was in the form of Lombard loans, although the bank also has notable exposure towards the commercial and industrial sector (54% of APAC s loan book), notably towards acquisition finance, and which can generate material single name concentrations. Credit quality in APAC is strong but can be more volatile, but exposures are geographically diversified. SRU Books Material Impaired Loans At end-3q17, about 2% of gross loans were booked in the SRU, although, with a gross impaired loans ratio of 34%, this division booked 40% of the group s unreserved impaired 8

9 M M M M M M17 Banks loans. Credit quality in the unit is by definition poor but benefits from more proactive reduction efforts. We expect exposures booked in the SRU to add some volatility to asset-quality metrics, as seen with the increase in impaired loans (CHF1.1 billion) at end The unit includes derivatives in run-off, loans and financing, and former private banking exposures. We expect the bulk of the remaining exposure reductions to focus on assets with lower risk density. The bank plans to reach USD11 billion credit and market risk RWAs and USD40 billion leverage exposure (USD68 billion at end-3q17) targets from 2019, which will allow residual assets to be reintegrated within the operating divisions. The balance of the loan book was split between Global Markets (4%) and Investment Banking and Capital Markets (2%) Low Impairments Impaired loans of CHF2.2 billion at end-3q17 were relatively unchanged from end-2016 and account for a limited 80bp of gross loans. Although they had increased by CHF0.5 billion in 2016, reflecting several impairments in ship finance, largely booked in the SRU and to a lesser extent in IWM, about half of the 2016 SRU increase reversed in 1Q17. This was achieved thanks to repayments, upgrades and sales, largely in oil and gas, but also export finance loans and reduced impaired ship finance exposures. Loan Split (CHFbn) 9M % NIG 9M17 Mortgages Commercial & industrial Collateralised by securities Real estate Financial institutions Governments and supranationals Consumer finance NIG: Non-investment grade according to internal scale among counterparties with an internal rating for gross loans held at amortised cost Impaired Loans By division Impaired loans with >100% coverage Unreserved (CHFbn) Reserved SRU IWM SUB APAC GM IBCM Sizeable Investment Banking Exposures Credit Suisse s capital market operations are material and expose it to more volatile asset classes. The bank is active in leveraged finance, where it maintains sizeable notional limits and sub-limits for non-investment-grade exposures. Depending on market conditions, utilisation of these limits is reassessed periodically and can be adjusted. Turnover of underwriting exposures is carefully monitored to ensure the bank s temporary exposures are as intended. Credit Suisse is mainly active in the US and therefore subject to US bank regulators leveraged finance guidelines. Lending activities are not conducted out of ECB-regulated entities. Investment banking exposures also include CHF142 billion trading assets (18% of total assets at end-3q17), which include CHF52 billion equities, the vast majority of which are listed, and CHF63 billion debt, with the balance related to derivatives, largely related to interest-rate and foreign-exchange contracts. Level 3 assets of CHF18 billion at end-3q17 represented 6% of total assets at fair value, largely related to loans and debt valued based on models and using little or no observable inputs. The bank maintains a moderately small appetite for CLO warehousing, which is well-managed. Exposure to CRE is concentrated in Switzerland, but the bank has a strong franchise in US CRE. This includes exposure to US CRE CMBS, which operates an originate-to-distribute model. Exposure to the oil and gas industry is significant and includes exposure to exploration 9

10 1H15 2H15 1H16 2H16 1H17 9M16 9M17 Banks and production corporates (which are more sensitive to changes in oil prices), but the recovery in the oil price has led to loan loss provision reversals between end-2015 and end-3q17. Earnings and Profitability Early Signs of Improvement to Modest Profitability Credit Suisse aims to achieve a return on tangible equity of 10%-11% by 2019, an improvement from the 4.1% reported in 9M17. The bulk (4.5%) of the increase will come from identified cost savings according to the company, notably related to the wind-down of the SRU, lower funding and restructuring costs and the non-recurrence of legal entity set-up costs. Funding costs should benefit from about USD8 billion of expensive legacy instruments rolling off by The bank estimates funding costs are likely to fall to about USD2.2 billion by 2019 (USD2.8 billion in 2016), as a USD0.8 billion reduction in capital instrument funding costs, reflecting the run-off of legacy instruments and lower amounts of high-trigger AT1 capital, is partly offset by a USD0.2 billion increase related to the shift towards holding company senior debt. Restructuring costs are planned to reduce to CHF0.3 billion in 2018 and nil thereafter. Notable improvements were already achieved in the nine months to end-september 2017, when results were markedly higher than the CHF63 million pre-tax loss reported in 9M16. The latter was partly driven by CHF443 million mark-to-market losses on securitised products and distressed debt, business that the bank subsequently largely exited. Results are still distorted by the relatively large losses from the SRU (CHF1.7 billion pre-tax losses in 9M17), without which the bank would have reported CHF3.3 billion pre-tax profit, with an average return on regulatory capital of 11%. Pre-Tax Profit SUB APAC - WM IBCM SRU (CHFbn) IWM APAC - markets GM 6M 9M Adjusted for litigation, restructuring and nonrecurring gains/losses on sale Source: Fitch Large Proportion of Capital Markets Revenue Despite showing some improvements in profitability, the bank s earnings remain potentially volatile. The proportion of revenue from trading, underwriting and advisory at Credit Suisse is higher than at GTUB peers (44% in the 12 months to end-september 2017) and renders earnings dependent on capital markets. In the 12 months to end-september 2017, fixedincome trading revenue accounted for 14% of group revenue, and about 52% of GM revenue, exposing group earnings to changes in the credit cycle. While Credit Suisse s earnings benefit from the bank s strong wealth management franchise, these are also exposed to client and market sentiment. Successful Cost-Reduction Plan In 9M17, the bank had achieved a further CHF1.0 billion of the targeted CHF0.9 billion cost savings for These savings were realised keeping restructuring costs below expectations, the bulk of which relate to severance costs. SRU Reintegration Expected in 2019 While we the SRU continues to materially affect results at present, its reintegration into the business from 2019 and the guidance for lower SRU losses (from USD1.7 billion in 9M17 to USD1.4 billion for 2018 and USD0.5 billion for 2019) should improve the bank s operating profit materially. SRU losses are mainly driven by negative revenue from legacy investment banking portfolios, as well as associated operating expenses and funding costs. These will roll off in 2018 and 2019, and expenses will fall as further businesses are deconsolidated. 10

11 Restructuring leads to improved 9M17 earnings Operating profit excluding litigation and SRU Operating profit (% RWAs) Litigation SRU Adjusted operating profit Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Fitch, Credit Suisse. Adjusted operating profit shown in purple where SRU/litigation losses exceeded operating profit. Dotted lines define ranges that imply different earnings sub-scores (absent qualitative adjustments). 'a' 'bbb' SUB and Private Banking Key Profit Contributors The SUB division remained the group s largest contributor to pre-tax profit (CHF1.7 billion; 36% in the 12 months to September 2017), with revenue broadly equally split between private and corporate clients, and generating an adequate adjusted return on regulatory capital of 15% and a 66% cost/income ratio in 9M17. Cost control contributed to a 6% yoy pre-tax profit increase in 9M17 (excluding non-recurring gains on sale, restructuring and litigation), as underlying revenue growth of 2% was led by corporate and institutional clients. Net margins on AuM for the private clients business were high at 43bp in 3Q17 (gross margin of 142bp) despite a larger AuM base, which stood at CHF206 billion at end-3q17. Private Banking, SRU & Litigation Key Pre-Tax Profit Contributors Adj. pre-tax profit, 12 months to September 2017 (CHFbn) SUB IWM GM APAC IBCM CC SRU SRU litigation 36% 27% 14% 14% 9% Pre-tax profit adjusted for non-recurring gains on sale. Percentages shown as a proportion of core businesses 0.4 Pre-tax profit in IWM rose by a strong 28% to CHF1 billion in 9M17, led by a sound 10% revenue growth, mainly in private banking (72% of 9M17 revenue, the rest being asset management). Net loans were 11% higher and contributed to an 12% yoy improvement in net interest income in 9M17 which also benefitted from higher US dollar rates. Controlled expenses led to a marked improvement in net AuM margins, from 25bp in 3Q16 to 31bp in 3Q Total Global Markets Revenue Mild FICC recovery, equities weaken Underwriting Equity sales and trading (CHFbn) Fixed income sales and trading M17 Note: 9M17 not annualised Not shown: negative revenue booked in 'other' (CHF159m in 2013, CHF236m in 2014, CHF207m in 2015, CHF216m in 2016 and CHF160m in 9M17) Cost-Cutting Benefits Global Markets A 4% increase in revenue to CHF4.4 billion and an 11% fall in operating expenses to CHF3.7 billion helped GM generate CHF645 million pre-tax profit in 9M17 (CHF43 million in 9M16 including asset mark-downs), a 7% return on regulatory capital. The bank was on track to meet its targeted CHF6 billion annual revenue and CHF4.8 billion operating expenses for the year. Fixed-income trading revenue recovered from a weak 9M16 (CHF2.5 billion compared to CHF2.1 billion in 9M16, 54% of the division), and equity trading revenue of CHF1.4 billion fell by 16% yoy. In 1Q17, Credit Suisse transferred the systematic market making group, a subset of its equity trading business (CHF400 million revenue in 2015 and CHF195 million in 2016) to its asset management division, where it will be funded externally. Pre-tax profit of CHF262 million in IBCM improved materially yoy (CHF112 million in 9M16) led by a 13% increase in revenue, with strong market shares in leveraged finance and IPOs. Debt 11

12 MS HSBC DB UBS CS BARC Citi JPM GS BAC BNPP SG Citi BAC JPM MS GS HSBC CS UBS BARC SG BNPP DB Banks underwriting revenue rose 11% yoy and accounted for about half of the division, with equity underwriting providing a further 17% after a strong rebound in 1H17. Advisory revenue fell 3% yoy and provided 36% of divisional revenue. RWAs increased 8% yoy, reflecting higher debt underwriting activity and growth in the corporate bank. Diverging Trends in Asia Pacific Asia Pacific pre-tax profit of CHF553 million in 9M17 was 11% lower yoy, as lower client activity and volatility in equity trading along with an inflexible cost base resulted in losses for the markets portion of the division in 1H17, which more than offset a 74% improvement in wealth management and connected (private banking and to a lesser extent advisory, underwriting and financing revenue from high-net-worth entrepreneurs in the region) pre-tax profit to CHF570 million. Continued low client activity in the region is likely to make reaching the CHF1.6 billion divisional pre-tax profit target challenging. Within this target, the bank was on track to meet its previous CHF0.7 billion pre-tax profit target for wealth management activities (updated in December 2017 to CHF0.85 billion), but generating significant profits in the markets segment of the APAC division will in our view be more challenging and require substantial revenue improvements. Capitalisation and Leverage Sound Capital Ratios; Tail Risks Receded Following a CHF4.1 billion rights issue in 2Q17, Credit Suisse s capital ratios compare well with GTUB peers and now exceed the bank s 2020 going concern capital requirements, both based on RWAs and leverage exposure. The group s FCC ratio was 13.7% at end-3q17, 80bp higher than at end Its fully loaded Basel III CET1 ratio of 13.2% at end-3q17 reflected the capital increase (qoq increase of 160bp in 2Q17) as well as the impact in 3Q17 of an operational risk add-on in relation to mortgage-related litigation settlements. The bank plans to operate with a Basel III CET1 ratio above 12.5% and a 5% Tier 1 leverage ratio in the medium term. We expect capital ratios could converge towards these levels. In line with its plans, we expect exposure growth in strategic markets could outpace internal capital generation in the medium term. We expect internal capital generation to remain muted in 2017 due to the material losses generated by the non-core unit, but this should improve from 2018 as the losses reduce and the restructuring progresses. The capital raising took place after the settlement in 4Q16 with the US Department of Justice on past practices in the RMBS business. This had a negative impact on capital of about 90bp. While tail risk on possible fines and penalties has reduced, in our opinion, the bank s relatively small capital base in absolute terms (CHF35 billion look-through CET1 capital and CHF44 billion equity at end-3q17), in relation to the risks related to the sizeable capital markets businesses, makes the bank more vulnerable than peers to external shocks. Capital encumbrance from unreserved impaired loans has increased since end-2015 but remains low (about 3.5% of FCC at end-3q17). CET1 Ratio vs. Peers End-3Q17 (%) End-3Q17 CS target Peer median Source: Fitch, banks Leverage Ratio vs. Peers End-3Q17 (%) End-3Q17 Peer median CS target US: Fully-loaded supplementary leverage ratio Europe: Basel III fully-loaded Tier 1 leverage ratio Source: Fitch, banks 12

13 RWAbased Leveragebased Banks The capital raising took place after the settlement in 4Q16 with the US Department of Justice on past practices in the RMBS business. This had a negative impact on capital of about 90bp. While tail risk on possible fines and penalties has reduced, in our opinion, the bank s relatively small capital base in absolute terms (CHF35 billion look-through CET1 capital and CHF44 billion equity at end-3q17), in relation to the risks related to the sizeable capital markets businesses, makes the bank more vulnerable than peers to external shocks. Capital encumbrance from unreserved impaired loans has increased since end-2015 but remains low (about 3.5% of FCC at end-3q17). On the other hand, raising capital through a rights issue rather than through a partial sale of Credit Suisse (Schweiz) AG highlights the group s good access to capital markets. Progress Towards Meeting Gone Concern Requirements The bank now exceeds its Swiss too-big-to-fail going-concern leverage ratio requirement of 3.5% of leverage exposure in CET1 capital by 30bp, and its going-concern capital requirement of 5% of leverage exposure by 20bp. FINMA has imposed an add-on on Credit Suisse s operational risk exposures effective 3Q17 in respect of its residential mortgage-backed securities legal settlements. This resulted in a negative impact of 26bp of RWAs on the CET1 ratio, which could in future be mitigated by lower operational-risk RWAs in the SRU, subject to FINMA approval. Leverage-Based Requirements Currently Binding End-3Q17 CET1 High-trigger AT1 Low-trigger AT1 Low-trigger Tier 2 Holdco senior debt Implied going concern requirement Implied gone concern requirement End-3Q17 3.8% 0.8% 0.5% 3.2% 1 Jan 20 target CHF91bn 1 Jan 20 target CHF76bn End-3Q % 2.8% 1.8% 11.1% (CHFbn) Going concern: CET1 + HT AT1. LT AT1 qualify for inclusion in going concern until first call date; LT Tier 2 instruments qualify as going concern until the earliest of end-2019 and their first call date but are shown here as gone concern Figures may not add up due to rounding. Source: Fitch, Credit Suisse We expect Credit Suisse to continue issuing high-trigger AT1 instruments to gradually replace low-trigger instruments, which are subject to grandfathering rules until 1 January 2020, when Swiss too-big-to-fail rules come into force. Under the Swiss regime, going-concern capital requirements can be met with CET1 capital and high-trigger AT1 instruments, while outstanding low-trigger AT1s qualify as going-concern instruments until their first call date (the bulk of the CHF4.8 billion outstanding for Credit Suisse have a first call date in 2023 or 2024), after which they can be used to meet gone-concern requirements. Low-trigger Tier 2 instruments qualify as going concern until the earliest of end and their first call date (CHF4.1 billion instruments outstanding). In order to meet its gone-concern leverage-based requirement of 5% of leverage exposure by 1 January 2020, Credit Suisse would need to issue about CHF16 billion in holding company senior debt (based on end-3q17 figures), which we view as manageable given the group s issuance plan (CHF8 billion-chf10 billion holding company debt issuance is planned for 2017). Material Capital in the US Credit Suisse has a material presence in the US, organised since 1 July 2016 under Credit Suisse Holdings (USA), Inc, the group s US intermediate holding company (IHC). The IHC has filed its first non-public Comprehensive Capital Adequacy Review (CCAR) in April We expect substantial amounts of capital (USD14.5 billion CET1 capital at end-3q17 in the US 13