‘Unacceptable’: Credit Suisse reveals further mega losses from the disastrous Archegos trade
The stunning implosion of Archegos Capital Management, whose speculative bets roiled Wall Street, is now expected to cost Credit Suisse an even 5 billion francs ($5.5 billion), wiping out in one fell swoop five years of profits at its investment banking division.
Investors punished the stock, sending shares down 4.5% at the open Thursday in Zurich.
The scandal-plagued Swiss lender, which sold 203 million shares via mandatory convertibles on Thursday, said it had not yet fully unwound trades connected with Bill Huang’s hedge fund and forecast further related headwinds of 600 million francs ($656 million) for the second quarter.
This comes on top of the 4.43 billion francs charge booked in the first three months of the year, pushing the group 757 million francs into the red, albeit less than initially feared.
“The loss we report this quarter because of this matter is unacceptable. Together with the Board of Directors, we have taken significant steps to address this situation,” said Chief Execuitve Thomas Gottstein in a statement.
Echoes of Long-Term Capital
At the end of last month, JP Morgan raised its forecast for the banking sector’s collective Archego losses to $10 billion. Rivals Nomura and [hotlink]Morgan Stanley[/hotlink] have estimated their respective hit to be a fraction of Credit Suisse, however.
“It is an exceptional event. I think the last time the industry has seen something similar is LTCM,” Credit Suisse chief financial officer David Mathers told analysts on Thursday, referring to the collapse in the 1990s of hedge fund, Long-Term Capital Management.
Despite an otherwise strong underlying Q1 performance in investment banking led by a surge in underwriting, Credit Suisse initiated a strategic review with the aim of slimming the division’s leverage and assets. The prime brokerage business responsible for the Archegos disaster would shrink to focus on only the bank’s most important clients, it said.
Credit Suisse shored up its balance sheet by issuing two notes convertible into roughly 8.3 percent of its outstanding shares. This will raise an estimated 1.7 billion francs in net proceeds and bolster its loss-absorbing capital well above regulatory minimum thresholds for solvency.
The Archegos loss followed swiftly on the heels of the collapse of Greensill Capital, forcing Credit Suisse to liquidate investment funds whose assets were linked to the now insolvent supply chain finance firm.
Clients now face potentially billions in losses on what were supposedly safe, short term investments. Credit Suisse didn’t rule out additional charges to its income statement, either, already booking a $30 million write down related to a bridge loan to Greensill.
Adding to investor jitters, the Swiss financial watchdog, FINMA, said on Thursday it’s opened enforcement proceedings against the bank for its role in the Archegos and Greensill collapses.
Cleaning house
Earlier this month, investigations were launched into each affair, bonuses for the C-suite were eliminated, and the proposed dividend slashed by two-thirds. It also cost the job of both the division’s head, Brian Chin, and risk and compliance boss Lara Warner.
Their departures however cast a negative light on Gottstein. He promoted Chin to the role and expanded Warner’s remit this summer as part of an efficiency plan designed to save up to 450 million francs annually from next year. This looks to be a now fateful decision as Archegos-related losses will eat up a decade of those planned savings.
A defiant Gottstein vowed shortly afterwards to stay on right the ship together with the new chairman of the board come May, António Horta-Osório,
The current CEO of [hotlink]Lloyds Banking Group[/hotlink] has his work cut out for him: amid the two single biggest global financial debacles so far this year, Credit Suisse found itself in the middle of both.
Credit Suisse’s fortunes have soured quickly. Only six months ago, the outlook was brightening for the bank’s long suffering shareholders. On the back of solid third-quarter results, it decided at the end of October to pay out the remaining half of the 2019 dividend cut at the request of Swiss regulators.
It simultaneously resumed share buybacks suspended due to the pandemic, and earmarked a further billion francs for this year. The move marked the beginning of a 50 percent surge in the stock price, but the rally petered out earlier this year amid a steady stream of news, including the suspension of further stock repurchases.
As of late April, Credit Suisse has relinquished almost all its gains made in the past half year.
This story was originally featured on Fortune.com
