ZURICH • Credit Suisse said yesterday that it will boost capital reserves after taking a multibillion-dollar hit from the collapse of United States investment fund Archegos, while regulators announced an enforcement case against the bank over the matter.
Switzerland's second-biggest bank after UBS posted a slightly smaller-than-flagged 757 million Swiss franc (S$1.1 billion) first-quarter pre-tax loss, as the Archegos hit wiped out gains from a bumper trading quarter.
Stripping out the 4.4 billion franc hit and other significant items, the bank said pre-tax profit would have been 3.6 billion francs, which would have represented its best quarter operationally in at least a decade.
A net loss of 252 million francs compared with a mean estimate of 815 million francs in the bank's own poll of 17 analysts.
Alongside announcing its earnings, the bank said it will issue mandatory convertible notes (MCN) convertible into 203 million shares, which should net the bank more than 1.8 billion Swiss francs. That would boost its core capital level to around 13 per cent from 12.2 per cent.
"The loss we report this quarter, because of (the US-based investment fund) matter, is unacceptable," chief executive Thomas Gottstein said in a statement.
"We expect that our successful MCN placement today 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.
The bank said it expects a residual impact of approximately 600 million francs from the matter in the second quarter of this year. It had already exited 97 per cent of related positions, it said.
That, plus the demise of another client, Greensill Capital, has triggered internal and external probes and the ousting of a swathe of executives.
Yesterday, the Swiss financial market supervisor said it had opened two enforcement proceedings against the bank related to both matters and would be appointing a third-party agent to investigate possible shortcomings in risk management.
The regulator said it had taken precautionary measures, including capital surcharges as well as reductions in or suspensions of variable remuneration components.
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 rose nearly sixfold. Morgan Stanley disclosed an almost US$1 billion (S$1.3 billion) loss from Archegos, yet still reported a 150 per cent jump in profit.
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 episodes with Archegos and Greensill.
Mr Gottstein has been grappling with limiting the longer-term damage to the bank's reputation caused by the recent troubles and retaining both clients and staff.
But broader strategic initiatives have remained pending until current shareholders - as widely expected - elect Lloyds Banking Group CEO 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 its risk appetite, and impact staff and client relationships.
The bank yesterday said it had cut costs by 2 per cent year on year in the first quarter, mainly through lower compensation expenses.
Investment banking posted a US$2.6 billion pre-tax loss, as a 29 per cent leap in fixed income sales and trading, a 23 per cent leap in equity sales and trading revenue, and much larger gains in its capital markets and advisory business failed to offset the hit from Archegos.
The bank's asset management unit, meanwhile, which ran US$10 billion in funds linked to Greensill, saw profit dip 30 per cent as a rise in managed assets could not prevent revenue from falling as a result of "significant items".
The unit, which is currently 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 a different US investment fund.
Earlier this month, 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.
Data from researcher Morningstar estimated that asset flows into Credit Suisse's Europe-domiciled fund range dropped last month, when it announced the suspension of its Greensill-linked funds.
Credit Suisse said it was enhancing due diligence in the unit following the Greensill matter, and conducting a group-wide review of risk in cooperation with its board and external advisers.
REUTERS
