Moody’s placed Aa1 rated Credit Suisse on review for possible downgrade yesterday (Monday) following higher-than-anticipated losses, which were concentrated in its investment banking segment.

Covered bonds issued by Credit Suisse are rated Aaa by Moody’s and have a Timely Payment Indicator (TPI) of “probable”. The TPI leeway for the programme is five notches, meaning the issuer would need to be downgraded to Baa1 before the covered bonds were downgraded, all other things being equal.

The issuer rating action was a result of the Swiss bank producing weaker results than Moody’s had been expecting, “and highlighted the challenges that the bank faces in the current environment”. The rating agency said much of the decline was driven by the overhang of macroeconomic uncertainty and the adverse impact of illiquid markets during the quarter on fixed income sales and trading revenues.

Credit Suisse announced that it had a pre-tax loss of Sfr800m (Eu646m), excluding fair value gains on its own debt due to widening credit spreads, for the third quarter of 2011. Moody’s said the issuer also reported that its investment banking segment had a pre-tax loss of Sfr681m (excluding fair value gains and losses on its own debt). Its private banking segment also suffered a decline in pre-tax profits, down 14% from the second quarter and 21% from a year ago (excluding provisions for litigation charges in wealth management related to US and German tax matters).

Credit Suisse’s fixed income sales and trading revenues suffered a more significant year over year decline than many of its peers, said Moody’s, despite the bank having taken steps to strengthen the client facing trading franchise over the past two and a half years. The rating agency believes this reflects the bank’s greater reliance on credit and mortgage trading, it said, adding that the bank’s quarterly results have been more volatile than similarly rated peers and its year to date returns relative to risk-weighted assets are weaker.

However, Moody’s noted the bank has demonstrated consistent strength in risk management since the start of the financial crisis.

“Credit Suisse is among the highest rated banks in the world today,” said David Fanger, senior vice president at Moody’s. “The bank’s numerous strengths left it well positioned relative to peers during and in the immediate aftermath of the financial crisis.

“However, we believe that the challenges the bank now faces, and the re-engineering those challenges will require, increase the risks to bondholders relative to other similarly rated companies such that a lower rating may be more appropriate.”

Moody’s review will focus on restructuring steps being undertaken by Credit Suisse, and their implementation, as well as the underlying profitability trends going forward.

“We believe the need for further restructuring is driven by both the macroeconomic uncertainty and the increased pressure on shareholder returns that is likely to result from higher regulatory capital requirements,” said Fanger. “While this pressure also exists at many of Credit Suisse’s peers, we believe Credit Suisse is more challenged due to its mix of business.”