Moody's Investors Service, a rating arm of Moody's Corporation MCO affirmed Debt and deposit ratings of Credit Suisse Group AG CS. The Swiss bank's long-term deposit rating has been affirmed at A1, senior debt rating at A1 and standalone baseline credit assessment (BCA) at baa2.
The rating firm’s outlook for the bank remains “stable”.
Rationale Behind the Affirmation
The rating affirmation follows Credit Suisse's agreement with the U.S. Department of Justice (DoJ). The bank has entered into a settlement, in principle agreement, associated with the civil claims related to the issuance and underwriting of residential mortgage-backed securities (RMBS) through 2007.
Per the agreement, Credit Suisse will be paying a civil monetary penalty of $2.48 billion. Further, post settlement amount of $2.8 billion will be paid in consumer relief, spread over five years, which will not impact 2016 results.
Moody's views the settlement as positive for Credit Suisse's creditors as it will reduce litigation issues not impacting capital ratios much. Including increase in reserve related to recent settlement, the bank's CET1 ratio on a fully-loaded basis will be about 11.2%.
Notably, Credit Suisse targets to increase its existing litigation reserves in fourth-quarter 2016 by $2 billion (CHF 2.05 billion) to CHF 4.2 billion prior to the settlement.
However, certain RMBS-related issues still remain for Credit Suisse, with a number of states' attorney generals and the Federal Deposit Insurance Corporation (FDIC). Therefore, Moody’s rating might change if any unexpected penalty outcome is visible for these claims.
In addition, the rating firm believes that Credit Suisse’s performance related to its restructuring efforts is in line with the current baa2 BCA, reflecting a balance between its future profitability and execution challenges. Moody’s anticipates that this could result in a higher rating, if the bank is able to achieve a significant and sustainable level of profitability resulting from successful restructuring exercises.
However, Moody’s remains apprehensive due to the current state of the company’s business, presently in the trough of restructuring efforts, resulting in poor profitability. Further, it projects that the company’s business will continue to be strained by the disposal of non-core assets held in Strategic Resolution division.
Credit Suisse currently carries a Zacks Rank #4 (Sell). The company’s stock has underperformed the 5.8% growth for the Zacks categorized Foreign Banks industry since the beginning of the year.
Some better-ranked foreign stocks in the same space include Banco de Chile BCH and Banco Santander (Brasil) S.A. BSBR, both holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Both the stocks have outperformed the 5.8% growth for the Zacks categorized Foreign Banks industry since the beginning of the year.
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MOODYS CORP (MCO): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
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