Credit Suisse’s Archegos Post Mortem Slams Management; Profit Slumps

By Brenna Hughes Neghaiwi

The collapse of Archegos rocked Wall Street in March as its highly leveraged stock bets went sour, sending banks scrambling for the exit. In a $10 billion bloodbath, Credit Suisse was the biggest loser, a devastating double whammy for a bank already reeling from the insolvency of a key associate, Greensill Capital.

Archegos is still hitting Credit Suisse’s bottom line. Net profit of 253 million Swiss francs ($278.45 million) missed average forecasts for 334 million Swiss francs as it absorbed an additional $653 million loss from the fund’s collapse and amid a general slump in trading.

In a damning assessment of what went wrong, an independent review unveiled along with the results on Thursday repeatedly criticized the bank’s risk management practices, though it did add there was no evidence of fraudulent or illegal activity.

“The Archegos-related losses sustained by Credit Suisse (CS) are the result of a fundamental failure of management and controls in CS’s Investment Bank and, specifically, in its Prime Services business. The business was focused on maximizing short-term profits and failed to rein in and, indeed, enabled Archegos’s voracious risk-taking,” the 165-page review by law firm Paul Weiss, Rifkind, Wharton & Garrisson said.

(To read the report, click https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html )

The bank said in response that it would “put risk management at the heart of our decision-making processes”.

Shares of the bank pared early losses to trade down 2.4% by 1045 GMT, taking their losses to 22% so far this year. The European bank index rose 1.8% and is up about 24% year to date.

Analysts had expected a nearly 600 million franc hole caused by more losses at Archegos and further weakness in the bank’s trading and advisory businesses to bring second-quarter net profit down to a quarter of its value a year ago.

Excluding Archegos and other significant items, Credit Suisse said pre-tax income would have dropped 11%.

Credit Suisse said action has been taken against 23 staff over Archegos, with nine fired and a total of $70 million in monetary penalties taken from all of them.

Under new Chairman Antonio Horta-Osorio, it is trying to turn the page after a swathe of investigations, executive changes, and divisional reshuffles. Management is promising to unveil a strategic overhaul by year-end.

An exodus of senior dealmakers and traders from its investment bank, and plans to reduce risk in its prime brokerage unit, have made the changes especially felt within that division.

The bank said on Thursday that a provisional capital buffer for Archegos has been removed, but a buffer for Greensill remained. It said it was in advanced talks with some creditors to recover some of the $10 billion of client investments linked to Greensill.

It also said it had been accruing for dividends during the quarter but the size of the payout had yet to be determined.

“Management provided some reassurance on the call suggesting this quarter’s focus was on dealing with the fall-out of Archegos and Greensill, but we could potentially return to a more ‘business as usual’ quarter as early as 3Q21,” Citi analyst Andrew Coombs wrote in a note.

LEADING WEALTH MANAGER WITH A CULTURE PROBLEM

Investors have been waiting to see whether troubles at Credit Suisse, which have also left clients in its asset management business directly exposed to potential Greensill losses, have affected prized relationships with the ultra-wealthy.

Credit Suisse on Thursday reported 7.3 billion francs in net asset outflows from its wealth management businesses, an indicator of a loss in business from rich clients, for the second quarter.

Chief Financial Officer David Mathers told journalists on a call that 4.2 billion francs of the outflows were related to its efforts to limit its risk in Asia.

“Operationally, CS has been able to meet expectations on the whole,” ZKB analysts said in a note, adding the headline profit miss was related largely to legal and restructuring provisions.

“However, net new money is showing signs of slowing down with outflows of 4.7 billion francs,” the analysts said, referring to the group-wide figure which includes flows for businesses outside wealth management.

Earlier this week, Credit Suisse appointed Goldman Sachs partner David Wildermuth as its new chief risk officer, as it seeks to turn the corner on recent scandals.

REVENUES FALL

A 41% fall in investment banking revenues showed the broader impact of the scandals to be slightly more pronounced than analysts anticipated, as its capital markets business posted a nearly 10% decline on an un-adjusted basis and its advisory revenues fell 37% “due to timing of deal closings”. That combined with the $653 million Archegos hit pushed investment banking to a pre-tax loss.

On the trading side, adjusted revenues from equity sales and trading fell 17% decline excluding Archegos. Fixed income sales and trading dropped 33%.

Trading revenues also fell at major U.S. and European banks in the second quarter compared to 2020 when unprecedented market volatility during the early months of the coronavirus pandemic helped drive record volumes.

Credit Suisse has said it wants to pare back its prime brokerage unit, which conducts business with hedge funds and was responsible for the Archegos ties.

The downcast earnings marked a notable contrast to the sunny outlook presented on the same day by Lloyds, which until April had been run by Credit Suisse’s new chairman. Nearer rivals, including UBS and Julius Baer, have also put Credit Suisse’s misfortune in stark relief, as frothy markets and high client activity levels have continued to help private bankers generate higher earnings off the rich.

($1 = 0.9086 Swiss francs)

(Reporting by Brenna Hughes Neghaiwi, editing by Kirsti Knolle, Michael Shields and Kim Coghill)

Credit Suisse Taps Goldman Sachs Partner to Lead Risk Turnaround

(Clarifies interim roles in paragraph 5)

By Brenna Hughes Neghaiwi

Zurich-based Credit Suisse has been cutting risk after its prime brokerage business lost billions from the collapse of family office Archegos, and as its asset management division scrambles to return some $10 billion of client investments linked to insolvent supply chain finance firm Greensill.

Those scandals have prompted a swathe of sackings, executive changes and regulatory investigations, as well as a planned strategic overhaul which Chairman Antonio Horta-Osorio has said is to make risk and cultural change a top priority.

“I am delighted to welcome David to Credit Suisse, where he will help shape the Group’s enhanced risk management framework, an essential part of the bank’s strategic realignment currently underway,” Horta-Osorio said in a statement.

Former Chief Risk and Compliance Officer Lara Warner was one of the high-level casualties, replaced on an interim basis by Thomas Grotzer as compliance head and Joachim Oechslin as risk head. Credit Suisse said Oechslin, who already served as the bank’s risk chief under previous CEOs Brady Dougan and Tidjane Thiam between 2014 and 2019, would resume his role as strategic advisor to the CEO after Wildermuth’s arrival.

Wildermuth, a 24-year Goldman Sachs veteran, was appointed deputy chief risk officer at the U.S. financial giant in 2015 and has been a partner since 2010.

“David joins with an impressive track record, underlining our firm commitment to further enhance our risk management across the bank,” Credit Suisse Chief Executive Thomas Gottstein said in the statement. “He is the right person to lead and further strengthen our risk organization.”

Wildermuth will assume the role on February 1, 2022 at the latest, the Swiss bank said, and will be based in Zurich.

(Reporting by Brenna Hughes Neghaiwi, editing by Kirsti Knolle, Silke Koltrowitz and Tomasz Janowski)

Scandal-Hit Credit Suisse Considers Creating Single Private Bank

By Oliver Hirt and Pamela Barbaglia

The Swiss bank and its board are looking to decide on a fresh strategy as soon as October after meeting in the mountain town of Bad Ragaz, two sources familiar with the thinking of senior executives said.

Re-imagining the most prized part of Credit Suisse illustrates how deep this overhaul is likely to be, with executives discussing folding the private banking business and other services managing money for the world’s rich into one global division, the three sources told Reuters.

Targeting the client managers who deal with its wealthiest clients, many of whom are worth tens of millions of dollars, would scrap a regionalised structure introduced in 2015.

Such a change would reel local managers in Asia and internationally, who have enjoyed considerable autonomy, under tight Swiss control as well as making it easier to cut costs.

Credit Suisse declined to comment.

Its larger Swiss rival UBS adopted a unified global wealth management structure by combining its businesses servicing American and international clients into one global division in 2018, allowing it to trim costs.

DEFENCE STRATEGY

Credit Suisse executives and board members convened recently in Bad Ragaz, best known for its spas and thermal baths, for an annual strategy meeting.

The executives are concerned that Switzerland’s second-largest bank, which has been hit by two scandals this year, could face break-up calls from investors, or that its shrinking stock-market value makes it a foreign takeover target.

A domestic merger with UBS, something that has been discussed in the past, is viewed as a more palatable option, three sources also told Reuters last week.

Managers did not formally discuss mergers at Bad Ragaz, with the possibility of a tie-up “the elephant in the room”, one source said after the meeting.

Under the direction of its new chairman Antonio Horta-Osorio, Credit Suisse is looking to overhaul operations and prime its businesses to protect it from investor pressure.

By combining its wealth management businesses, Credit Suisse would be able to streamline products, while also becoming more attractive to a potential merger partner, one source said.

A global entity could also work better with the investment bank, which provides financial services to entrepreneurs and ultra-wealthy families, two of the sources said.

A combined unit may get new leadership, the sources said, adding that Horta-Osorio was driving key decisions on the bank’s overhaul and its management.

A merged wealth management unit could either combine the Asia-Pacific and International Wealth Management divisions, or further fold in the bank’s private banking business for ultra-wealthy customers in its home market, which now sits in its Swiss division, one source said.

Credit Suisse lost more than $5 billion in the rush to unwind trades by family office Archegos and faces legal action for helping clients invest $10 billion in bonds issued by collapsed supply chain finance firm Greensill Capital.

(Reporting by Oliver Hirt in Zurich and Pamela Barbaglia in London; Writing by Brenna Hughes Neghaiwi; Editing by Alexander Smith)

Credit Suisse Recovers More Assets in Suspended Greensill-linked Funds

“Together with the initial cash distribution and current cash and cash equivalents in the funds, the total cash position amounts to $5.9 billion as of May 14, 2021, which is more than half of the total (assets under management) of the four funds at the time of their suspension,” the bank’s asset management arm said in a statement to investors.

Having paid out some $4.8 billion in liquidation proceeds, the funds now hold some $1.06 billion in cash and cash equivalents.

It expected to provide an update on the next payments in late May or early June, it said.

Greensill Capital lent money to firms by buying their invoices at a discount, but it collapsed in March after one of its main insurers declined to renew its cover.

Among the investors burnt in the widespread fallout from Greensill’s collapse were clients of Credit Suisse.

Its asset management unit was forced in March to shut $10 billion of supply chain finance funds that invested in bonds issued by Greensill.

Credit Suisse previously disclosed some $2.3 billion worth of loans exposed to financial and litigation uncertainties within the funds, with some $1.2 billion of its assets related to Sanjeev Gupta’s GFG Alliance, which is being investigated by Britain’s Serious Fraud Office.

In March the bank hired financial adviser Houlihan Lokey to assist in evaluating the funds’ portfolio and credit risks, it disclosed on Tuesday.

Internally, it has established an investment committee to help manage the liquidation process and set up a special project to handle the recovery as well as any necessary legal enforcement and litigation strategies, it said.

(Reporting by Brenna Hughes Neghaiwi; Editing by Michael Shields)

Credit Suisse Goes Overweight Continental Europe Stocks on Recovery Potential

“European GDP is 5.5% below previous peak, the U.S. is back to previous peak and we now see a potential catch-up in Europe on the basis of the vaccine roll-out (possibly 70% of the adult population by early September), the fiscal boost (2% of GDP) and excess savings (4.5% of GDP),” Andrew Garthwaite said in a note to clients.

Credit Suisse singled out Southern Europe, especially Spain and Italy for largest GDP recoveries, thanks to tourism exposure, and the outsized exposure to banks. The bank also said it reduced its overweight in Germany.

(Reporting by Karin Strohecker, editing by Danilo Masoni)

Credit Suisse to Hire Over 1,000 IT Staff in India in 2021

The hires will comprise of developers and engineers with capabilities in emerging technologies such as cybersecurity, data analytics, cloud, API development, machine learning and artificial intelligence to support the bank’s digital aspirations, the Swiss bank said in a statement on Tuesday.

(Reporting by Silke Koltrowitz; Editing by Riham Alkousaa)

Credit Suisse Aims to Recoup Most Greensill-Linked Fund Assets

Switzerland’s second-largest bank last month closed around $10 billion of supply-chain finance funds that bought notes from Greensill. Of this, $3.1 billion has been repaid and $1.5 billion in cash was in the funds as of March 29, leaving more than $5 billion outstanding.

“Over time, we expect the majority part of the funds’ investments to be recovered in the liquidation process, and we have recourse to other measures should they be necessary, including possible legal action.

“We continue to explore other options for expediting the return of cash to investors,” it said in a notice to investors https://www.credit-suisse.com/uk/en/asset-management/funds/notice-to-investors.html dated March 31 and posted on its website.

The bank had also suspended four other Credit Suisse Asset Management (CSAM) funds that had invested in the supply chain finance funds.

To reopen these funds for valuation, subscriptions and redemptions, the illiquid part of the funds’ assets will be separated and “side pockets” will be created, it said.

For this illiquid part, clients will receive a separate share class. The side pocket share classes will be subsequently liquidated and paid out in cash.

“Subscriptions and redemptions of the original share classes reflecting the liquid part of the funds’ assets will resume as of April 7, 2021,” it said.

(Reporting by Michael Shields; editing by Jason Neely and Barbara Lewis)