(Bloomberg) — Credit Suisse Group AG is raising about $2 billion to shore up capital after warning of another financial hit from the Archegos Capital Management collapse, adding to the Swiss bank’s woes after two blowups within a month left investors nursing losses and questioning its leadership.
The bank, which exited about 97% of its exposure to Archegos, expects a related 600 million-franc ($654 million) hit in the second quarter and is tapping investors for about 1.8 billion francs of funding with two notes convertible into 203 million shares. Swiss regulator Finma has now started enforcement proceedings against Credit Suisse and the bank said it plans to cut back the prime brokerage business at the center of the losses.
Thomas Gottstein is battling to rescue a terrible start to the year — and possibly his short tenure as chief executive officer — after Credit Suisse was hit harder than any other competitor by the collapse of Archegos, the family office of U.S. investor Bill Hwang. The timing of the blow up could hardly have been worse, coming just weeks after Credit Suisse found itself at the center of the Greensill Capital scandal, when it was forced to suspend investment funds.
The double whammy wiped out a year of profit and left Gottstein fighting to demonstrate to incoming Chairman Antonio Horta-Osorio that he’s of the right mettle to carry the bank through one of the most difficult periods in its recent history. Having taken on the position more than a year ago, the bank had already stumbled with other hits before Greensill shattered what was supposed to be a new era of calm. The uncertainty is now set to endure with the Finma investigation.
In the aftermath of the two debacles, the bank replaced investment banking head Brian Chin and Chief Risk Officer Lara Warner, along with a raft of other senior executives including equities head Paul Galietto and the co-heads of the prime brokerage business, which was at the center of the Archegos losses. The bank also suspended its share buyback and cut the dividend.
Credit Suisse fell as much as 6% in early Zurich trading, taking this year’s losses to about 22%.
The bank also plans to reduce risk at both the investment bank, including cutting about $35 billion of leverage exposure at the prime brokerage unit — which services its hedge fund clients, Gottstein said in an interview with Bloomberg Television.
“Although capital has been mainly addressed, we still see questions remaining in terms of strategy and risk management,” JPMorgan Chase & Co. analysts wrote in a note to investors. “Capital has been clearly the main focus.”
The bank targets a CET1 ratio — a key metric for capital — of at least 12.5% for the first half given the pandemic and more generally 13%. That number had dropped to 12.2% at the end of the first quarter. The bank said the convertibles notes were sold to core shareholders, institutional investors and high net worth individuals.
Last week, Credit Suisse unloaded about $2 billion of stocks tied to the Archegos blowup in the second such block sale since the bank wrote down the bulk of its exposure in the first quarter.
The Greensill debacle is also far from over. Credit Suisse has so far returned about half the $10 billion in investor money held by the funds at the time of their suspension. While the bank marketed the funds as among the safest investments it offered, investors are left facing the prospect of steep losses as the assets are liquidated. Credit Suisse is leaning toward letting clients take the hit of expected losses in the funds, a person familiar with the discussions said earlier this month.
“We have good visibility for a large portion of the remaining positions,” Gottstein said. “There are three more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”
The Greensill incident also led to the head of the asset management unit, Eric Varvel, being replaced and the removal of the business from direct oversight of the wealth management unit. The impact for Credit Suisse from both Archegos and Greensill could add up to $8.7 billion, according to JPMorgan analysts Kian Abouhossein and Amit Ranjan.
First Quarter Highlights:
International wealth management pretax profit 523m francs vs 442m estimateCET1 ratio 12.2% vs 12.1% estimateProvisions for credit losses 4.4b francsNet revenue 7.6b francsSwiss Universal Bank pretax profit 665m francs vs 548m estimateAPAC pretax profit 524m francs vs 304m estimate
(Adds shares in sixth paragraph, cuts to leverage at prime unit in seventh)
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