Credit Suisse moves to boost capital ahead of a further Archegos hit

Zurich

CREDIT Suisse will raise over US$2 billion to strengthen its capital base after flagging a further hit from the collapse of US investment fund Archegos and as Swiss regulators took action against the bank over the multi-billion dollar debacle.

The demise of Archegos and another major client, British finance firm Greensill, triggered losses, sackings and bonus cuts at Credit Suisse at a time when rivals are revelling in bumper profit from trading and dealmaking. Its prime brokerage unit, which funded Archegos' stock bets, will be shrunk.

Credit Suisse said it expects a hit of about 600 million Swiss francs (S$870.09 million) for the April-June quarter after exiting most of its Archegos-related positions. A 4.4 billion Swiss franc hit in January-March wiped out what would have been a stellar trading period, leaving it with a slightly smaller-than-flagged pre-tax loss of 757 million francs.

Analysts pointed to the further Archegos hit and dilution caused by the issuance announced on Thursday of bonds convertible into 203 million shares.

"The loss we report this quarter, because of (the Archegos) matter, is unacceptable," chief executive Thomas Gottstein said, adding the bond placement "will further strengthen our balance sheet and enable us to support the momentum in our core franchise".

Credit Suisse has emerged as the bank hardest hit from exposure to Archegos, which collapsed when it could not meet margin calls.

On Thursday, Switzerland's financial market supervisor said it had opened two enforcement proceedings against the bank related to Archegos and Greensill and would appoint a third party to investigate possible shortcomings in risk management.

It said it had ordered several short-term measures to reduce the bank's risk exposure and had requested a suspension of some bonus payments.

Credit Suisse's new bond issuance will boost the bank's core capital level to around 13 per cent from 12.2 per cent, a level its chief financial officer said he had recommended the bank operate at "for the foreseeable future" and higher than its previous guidance.

US rivals, some of which were quicker to exit trading positions as Archegos collapsed, produced forecast-beating profit for the first quarter. Net income at Goldman Sachs Group Inc rose nearly six-fold. Morgan Stanley disclosed an almost US$1 billion loss from Archegos yet reported a 150 per cent profit jump.

Stripping out the 4.4 billion franc first-quarter hit from Archegos and other significant items, Credit Suisse said pre-tax profit would have been 3.6 billion francs, which would have represented its best quarter operationally in at least a decade.

Highlighting the strong environment, Credit Suisse posted bumper earnings in its Asia-Pacific unit, up 154 per cent year-on-year, and a 25 per cent pre-tax profit rise in its Swiss business - the only two divisions unscathed by the recent Archegos and Greensill episodes.

While Mr Gottstein has been grappling with limiting the damage to the bank's reputation and retaining both clients and staff, broader strategic initiatives have remained pending until current shareholders, as widely expected, elect Lloyds Banking Group chief executive Antonio Horta-Osorio as Credit Suisse's next chairman on April 30.

Analysts expect the troubles - which have hit the bank's capital reserves - to impact earnings in future quarters, as lower capital reserves may limit risk appetite and impact staff and client relationships.

The bank on Thursday said it had cut compensation and benefit costs by 5 per cent year-on-year, or 109 million francs on an adjusted basis. That represented a fraction of a massive drop in bonus accruals media had previously reported.

"In terms of employee retention (and compensation), we need to walk a balance. If we'd chose to increase compensation accruals this quarter after the bank has made a loss, I don't think that would be really acceptable to shareholders, frankly," CFO David Mathers said. "That's understood by everybody at the bank. But clearly, there's the rest of the year to play for, and we'll see how performance goes and accrue accordingly."

Investment banking posted a US$2.6 billion pre-tax loss, as a 29 per cent leap in fixed income sales and trading, 23 per cent leap in equity sales and trading revenue, and much larger gains in capital markets and advisory failed to offset the huge hit from Archegos that the unit recorded.

Its asset management unit, which ran US$10 billion in funds linked to Greensill, saw profit dip 30 per cent as a rise in managed assets failed to stop "significant items" pulling down revenue.

The unit, which is undergoing an overhaul, was already a source of trouble in the fourth quarter, when it was hit with a half-billion dollar impairment on a stake in another US investment fund.

In April, it said it had identified US$2.3 billion worth of loans exposed to financial and litigation uncertainties in its Greensill-linked supply chain finance funds. REUTERS