The third major rating agency follows S&P and Moody's in downgrading Credit Suisse in the wake of poor second-quarter results and a renewed strategic review.
Fitch Ratings downgraded Credit Suisse's Long-Term Issuer Default Rating to 'BBB' from 'BBB+', with the outlook negative. The bank's viability rating (VR) has also been downgraded to 'bbb' from 'bbb+', Fitch announced yesterday, making it the third major rating agency to do so in a week.
The downgrade follows Credit Suisse's announcement of a renewed strategic review and weak second-quarter results. Credit Suisse said it would give details of its strategic review along with its third quarter results. Fitch and the other rating agencies and at least one banking analyst are not waiting to see. As finews.asia reported, the announcement of the review was rather vague.
Fitch also stressed this point saying Credit Suisse's decision to review «its strategy for the second time in less than a year indicates material pressure on the group's business model and challenges for management to stabilize it.»
Material Restructuring Charges Expected
Fitch said its downgrade «follows Credit Suisse's announcement of a renewed strategic review and weak 2Q22 results, which in our view underline the challenges for the bank to stabilize its performance and to create a business model that will generate adequate profitability from its core wealth management franchise. The bank plans to announce the outcome of its strategic review in 4Q22, which Fitch expects to result in material restructuring charges at a time when the bank's weak performance limits internal capital generation.»
Furthermore, the «Negative Outlook» reflects the view that «a further restructuring plan after the strategic review will give rise to material execution risk, particularly if the restructuring requires material costs given the bank's weak earnings generation. Failure to stabilize the business model, to improve operating profitability, or to meet the commitment to maintain a common equity Tier 1 (CET1) ratio of at least 13% would be negative for ratings,» Fitch said.
Key Rating Drivers
One of the drivers of the lower rating was weak profitability. Credit Suisse's and CSAG's VRs are below their 'bbb+' implied VRs as the group's weak operating profitability has a strong impact on Fitch's overall view of its credit profile. The group's weak earnings profile reflects a weakened business model and provides a little buffer to fund the group's restructuring or to protect capital from unexpected credit, market or operational losses in a difficult environment.
Another was its unstable business model, and Fitch said it believes a prolonged restructuring period exposes the group to the risk of a weakening franchise and significant execution risk in a weak operating environment. Still, over the longer term, successful execution of the new strategy should result in a simpler group and less reliance on volatile earnings from the investment bank.
