New York November 2 2022: Credit Suisse Group AG’s long-term rating was downgraded by S&P Global Ratings to just one level above junk status, underscoring the bank’s challenges after it laid out a radical restructuring plan last week.
The Swiss bank’s long-term rating was cut to BBB- from BBB, with a stable outlook. That’s just one notch above the BB “speculative grade.” The US ratings firm, echoing several analyst after the restructuring was announced on Thursday, said it sees “material execution risks amid a deteriorating and volatile economic and market environment.” It also signaled that some details around asset sales remain “unclear.”
Credit Suisse’s new strategy triggered the biggest single-day decline on record on the day, with shares tumbling 18%, as investors weighed the high costs of the plan, the modest return predictions and the significant dilution. The strategic review came as the bank posted a quarterly loss of 4.03 billion Swiss francs, including a large impairment of deferred tax assets related to the revamp. The restructuring will see the investment bank broken up and will cost about 2.9 billion francs ($2.9 billion) through 2024.
“Credit Suisse’s third-quarter earnings pointed to a weakened franchise as its leading wealth management business proved less resilient than previously anticipated, demonstrated by client money outflows and an inflexible cost base,” S&P said in a statement.
Earlier this year, S&P had affirmed Credit Suisse’s long-term rating at BBB, citing the group’s commitment to strong capital, although the outlook remained negative amid uncertainties about the revised strategy.
The new downgrade means Credit Suisse has the worst credit rating from S&P among all major investment banks, creating a structural disadvantage as lower ratings usually translate into higher funding costs. They also tend to make lenders less attractive as counterparties for derivatives transactions.
The shares were down about 2% as of 10:30 a.m. in Zurich. Default swaps insuring Credit Suisse’s euro debt for five years ticked slightly higher in early trading. Bonds were little changed.
Several downgrades played an important role in Deutsche Bank AG’s loss of market share several years ago, and the firm’s rebounding credit ratings since then have similarly been a decisive factor in winning back that market share.
Meanwhile, Moody’s affirmed Credit Suisse’s senior unsecured debt rating at Baa2, and downgraded the long-term senior unsecured debt of a major subsidiary of the Swiss bank.
“With these ratings, a downgrade to non-investment grade does not seem imminent”, said Zurcher Kantonalbank analyst Christian Schmidiger.
To shore up its finances, the bank is planning to raise 4 billion francs through a rights issue and selling shares to key investors including the Saudi National Bank. Chairman Axel Lehmann has said the capital increase will make the lender “rock solid,” helping it to carry out the overhaul, which will see the bank spin out an investment banking boutique while shrinking the trading operations.
Other key elements of the restructuring include selling parts of its Securitized Products Group to Apollo Global Management Inc. and Pacific Investment Management Co.. The bank also wants to cut its workforce by 9,000 to 43,000 by 2025.
Bank executives had wanted to avoid a capital increase given the shares were trading near record lows, but saw outflows of assets and deposits from wealthy clients and ultimately decided to boost capital to help shore up its finances. The bank is also expecting a fourth-quarter loss.
Chief Executive Officer Ulrich Koerner said last week that the bank will “definitely” be profitable from 2024. The bank expects to pay only a “nominal” dividend until then.
As part of the capital raising, Saudi National Bank is set to become one of the Swiss bank’s biggest shareholders, with a stake of almost 10%. The Qatar Investment Authority, another top investor, is also set to increase its stake by investing alongside the SNB, the Financial Times reported.