Credit Suisse Girds for Billions in Losses From Archegos Hit
(Bloomberg) -- Credit Suisse Group AG hadn’t finished the probe of its last crisis when the newest one hit.
The Swiss bank expects its loss tied to the implosion of Archegos Capital Management to run into the billions, according to people with knowledge of the matter. The firm spent Monday trying to calm its shell-shocked staff while facing heat from investors already reeling from the bank’s exposure to Greensill Capital’s collapse earlier this month.
March’s blowups may wipe out more than a year of profits for the bank and threaten its stock buyback plans, as well as adding to the reputational hit from other missteps. With the shares posting the only decline among Europe’s major banks in 2021 and a new chairman starting next month, Chief Executive Officer Thomas Gottstein is facing questions over whether he and risk chief Lara Warner have a handle on the bank’s exposures.
“Risk control at every level in this bank must be examined and changes made where there are deficiencies,” David Herro, chief investment officer at Harris Associates, one of the biggest investors in the bank, said in an email. “But I state the obvious?”
The bank has said warned it faces “highly significant” losses tied to Archegos. Analysts at Berenberg pegged the hit at 3 billion Swiss francs, on top of 500 million francs from the Greensill issues.
Gottstein -- who’s been in almost constant fire-fighting mode since taking over about a year ago -- attempted to calm senior bankers and traders in a call late Monday, according to people with knowledge of the matter. Speaking alongside investment bank head Brian Chin, he said the bank was still working to figure out the size of the hit and told bankers this was a time to pull together and not focus on the potential impact on pay.
Senior bankers questioned when Credit Suisse would learn from the incidents. Executives also said it’s too early to say if the dividend is at risk, one of the people said.
While Credit Suisse isn’t the only bank to face losses from the family office of former hedge fund manager Bill Hwang, it’s just the latest in a series of loan losses, writedowns and scandals that seem to occur at ever shorter intervals. Gottstein has ordered reviews and made adjustments, but by and large has defended the bank’s appetite for risk.
Gottstein had elevated Warner to chief risk officer in his first reshuffle last year, when she was also given oversight of compliance. The promotion made her perhaps the bank’s most senior female executive and ended any questions of whether she would be held back by being a close confidante of Gottstein’s predecessor Tidjane Thiam. Thiam had promoted her to head of compliance and asked her to clean up legacy issues and help reset the risk appetite for his strategy, focused on doing more business with the bank’s wealthy clients.
Compared to some peers, Warner’s background is light on risk experience. She joined Credit Suisse as an equity analyst in 2002 and held several senior research roles until she became chief financial officer and chief operating officer for the investment-banking unit in 2010.
Warner has challenged her managers to engage more with the business, according to people who worked with her. Risk managers used to building computer models and dreaming up worst-case scenarios were asked to deliver presentations to market their achievements.
Credit Suisse late last year agreed to extend a $140 million loan to Greensill Capital, just months before its collapse. Risk managers at the investment bank in London were initially reluctant to grant the request, a person familiar with the matter has said. They then discussed the matter with their counterparts in the Swiss and Asian private banking units, which oversaw founder Lex Greensill’s personal wealth, and eventually were overruled.
Now the loan is in default and Credit Suisse has only recovered about half, after Greensill Capital collapsed in early March. Even worse, the bank had to freeze a $10 billion group of funds that its asset management unit ran with Greensill, threatening to damage relationships with key clients. The final financial hit isn’t clear yet as the bank winds down the funds, but it has already warned that not all the money may be recovered.
Credit Suisse’s impact from Archegos also has yet to be determined. While it and Japanese lenders Nomura Holdings Inc. and Mitsubishi UFJ Financial Group Inc. have flagged significant losses, other lenders to the family office -- such as Goldman Sachs Group Inc. and Deutsche Bank AG -- cut their exposure with no or only immaterial damage.
Credit Suisse’s 1.5 billion-franc share buyback could be a casualty as it tallies up the cost of Archegos, according to Eoin Mullany, a bank analyst at Berenberg.
Proxy adviser Ethos said investors should reject the proposed bonuses of the management for the financial year 2020 at the upcoming general meeting, in light of the potential losses. In addition, the adviser called for investors to not grant discharge to the board and executive management in order to retain their rights to file legal action against them.
The hits from Archegos and Greensill have spoiled a plan by Gottstein to start the year with a clean slate. The CEO late last year wrote down the value of the bank’s stake in hedge fund York Capital and took a hit related to a long-standing legal case into residential mortgage-backed securities, dealing the bank its first quarterly loss in three years. The crises have more than overshadowed its best start to the year in a decade.
“While all four events appear idiosyncratic in nature, it inevitably has led investors to question the strategic decision making at CS and the risk culture of the firm,” Andrew Coombs, a bank analyst at Citigroup Inc., wrote Tuesday.
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