Credit Suisse’s Pressure Points, From Luckin to Leveraged Loans

(Bloomberg) -- Credit Suisse Group AG gave the first detailed look into the pain European banks are facing from the coronavirus pandemic, setting aside more than $1 billion for writedowns and bad loans and warning there’s more to come.

While trading revenue jumped and net income of 1.3 billion francs ($1.33 billion) beat estimates, the bank took several hits in the first quarter that showed the many vulnerabilities of lenders in this crisis.

Here are six of them:

Luckin Coffee

Credit Suisse was stung by the collapse of Luckin Coffee Inc. in China following an accounting scandal, which led to a five-fold increase in Asian loan-loss provisions. The bank set aside about 97 million francs for soured loans, primarily related to three cases, the largest of which was Luckin Coffee, according to a person familiar with the matter. The bank only referred to a “Chinese food and beverage company” in its earnings statement.

Credit Suisse led the initial public offering for Luckin in New York last year and is among the biggest creditors on defaulted loans to Luckin founder Lu Zhengyao. Chief Executive Officer Thomas Gottstein said the “episode was unfortunate” but that it would not change Credit Suisse’s strategy of targeting entrepreneurs in Asia.

Leveraged Finance

Credit Suisse was also forced to take a writedown of 284 million francs in its leveraged finance business when investors started to shy away from risky debt in March. The amount was split between the trading division, which buys and sells the debt, and the advisory business that help companies issue it.

Chief Executive Officer Thomas Gottstein was quick to point out that these were not actual losses but potential losses, some of which involved underwriting commitments that were not yet financed. “If conditions normalize, then you would expect to see a recovery at least in part on the number,” said Gottstein.

Trading Loss

On the surface, Credit Suisse’s trading desks showed a solid performance, with a 21% increase in overall revenue, or 25% in U.S. dollars. That put the firm within striking distance of Wall Street peers, which saw a 30% increase.

But the performance was uneven across divisions and regions, with Asia seeing fixed income revenue more than double, while it gained just 11% at the main trading business, known as global markets. The Swiss bank also took a hit from a trade with a U.S. institution, according to a person familiar with the matter, fueling a jump in revenue losses to $182 million from $99 million a year prior.

Credit Drawdowns

A rush by clients to draw down their credit lines left Credit Suisse with more risk-weighted assets and hurt a measure of financial strength. That gauge -- the bank’s common equity Tier 1 ratio -- fell to 12.1% from 12.7% at the end of December, and Gottstein said he expected it to decrease further to 11.5% this year.

“I have to warn you, I think we will see an increase in credit-related RWA as a consequence” of credit rating companies catching up with the market turmoil, said Chief Financial Officer David Mathers on a call with analysts.

Nervous Clients

In the wealth and asset management business, Credit Suisse was able to attract 5.8 billion francs in new assets, but market declines still eroded the amount of money overseen for clients by 137 billion francs from the end of December, reducing fees.

Volatile markets also sent many rich clients fleeing risky investments for the safety of cash, which is less profitable for the bank. About a third of the assets the Swiss bank manages for the wealthy are now in cash. The Swiss private bank saw outflows of 4.2 billion francs, mostly from a single client.

Seed Investments

Credit Suisse took an impairment of about 100 million francs in its asset management business. About two-thirds of that relates to seed money or joint ventures with partners in the alternatives business in the U.S., CFO Mathers said on a call with analysts.

“I think we’ll need to see how these investments perform,” Mathers said. “This is obviously a risk for the second quarter.”

©2020 Bloomberg L.P.

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