Credit Suisse's Outlook Lowered by Moody's - Analyst Blog

Moody's Investors Service, the credit rating wing of Moody's Corporation ( MCO ) downgraded the overall outlook on Credit Suisse Group AG ( CS ) to 'Negative' from 'Stable' on Tuesday. However, it affirmed ratings of the company. While the rating on deposits and senior debt of the subsidiary Credit Suisse AG was A1/Prime-1, senior debt of the parent company was maintained at (P) A2.

The overall outlook downgrade follows the recent settlement of Credit Suisse with the U.S. Department of Justice (DOJ). It was alleged that the bank, in an attempt to maximize its profits, assisted Americans in evading U.S taxes. This resulted in a huge loss for the U.S Treasury.

As part of the settlement, Credit Suisse will pay CHF 2.5 billion ($2.8 billion) to the U.S regulatory authority. Moreover, the bank has acknowledged its wrongdoings, the first banking major to do so in the last 10 years.

The settlement will adversely impact Credit Suisse's second-quarter results as the bank has to bear an after-tax charge of CHF 1.6 billion during the quarter. This, on a pro forma basis, will lower the fully applied Swiss Basel III Common Equity Tier 1 (CET1) ratio of 9.9% (as of Mar 31, 2014) to 9.3%. Moreover, fully applied Basel III Tier 1 leverage ratio will decrease to nearly 3.0% from 3.2%.

Despite all the odds, Credit Suisse still targets to improve its Basel III CET 1 ratio to 10% (without including the retained earnings) by the end of 2014, through asset sales. However, this would not substantially strengthen the capital ratios given that the company intends to return around 50% of the earnings to shareholders through annual dividends.

The decline in the Credit Suisse's capital ratios shows that it is now susceptible to economic volatility and that its risk-absorbing capacity has deteriorated. Moreover, as per Moody's there remains limited chances of improvement in the capital ratios in the near term. This increases possibilities of a downgrade in the ratings of the company that has been maintained by the rating agency as of now.

Further, Moody's believe that the Credit Suisse pleading guilty for its wrong doings will negatively impact the company's the client base. This, in the long term, will weigh on the bank's profitability, limit its access to funding and constrain internal capital generation.

Nevertheless, as per Moody's, given the steady liquidity position of the Swiss multinational, it is unlikely that it would face a funding or liquidity crunch in the near term.

At present, Credit Suisse carries a Zacks Rank #4 (Sell). Better ranked foreign banks include Australia & New Zealand Banking Group Ltd. ( ANZBY )and ICICI Bank Ltd. ( IBN ). Both these stocks carry Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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