Investors seek answers on Archegos, Greensill

The logo of Swiss bank Credit Suisse can be seen at its headquarters in Zurich, Switzerland on March 24, 2021.

Arnd Wiegmann | Reuters

After soaring earnings beats from rivals on Wall Street, Credit Suisse is expected to report a large loss on Thursday as it navigates the fallout from two high profile crises.

The Swiss lender announced earlier this month that it had been hit by $ 4.7 billion by the collapse of U.S. family-owned hedge fund Archegos Capital and now expects a pre-tax loss of around $ 900 million Swiss francs ($ 960.4 million) for the first quarter.

The Archegos saga led to the departure of the CEO of the investment bank and the head of risk and compliance of the bank, and was preceded by a separate reshuffle in the asset management division following the l British supply chain finance firm Greensill Capital collapsed. Credit Suisse managed $ 10 billion in funds linked to Greensill.

Several US banks that also served as Archegos’ prime broker managed to exit their trading positions after the hedge fund failed to respond to margin calls, and have since produced eye-catching profit beats in the first quarter. .

Goldman Sachs reported an almost six-fold increase in net income as Morgan Stanley’s profit jumped 150%, despite a loss of $ 911 million from Archegos.

Credit Suisse stressed that apart from the Archegos and Greensill sagas, it was on track for its best underlying quarter in a decade in terms of financial performance.

However, investors will seek answers from the bank on the extent of its exposure to Archegos and Greensill and whether further success can be expected in the second quarter.

Questions that are “ unlikely ” to answer

“Investors are unlikely to get all of their questions answered at this point, especially in regards to Greensill risks, for which the group has provided periodic updates,” Amit Goel told CNBC on Wednesday, co-head of European bank equity research at Barclays. .

“For Archegos, the group can give more color if the whole exposure has been dropped, but if not, they may not disclose the residual positions / risks.”

A little more detail can be expected on the steps taken by management to address the risk management issues within the bank, Goel suggested, including the staff changes made during the overhaul of the business. investment banking and asset management in recent weeks.

The bank has launched two independent investigations into its investment banking and asset management operations in the wake of the Archegos and Greensill sagas, but a possible backlash from Swiss regulator FINMA will also be on the radar for investors, according to Johann, Morningstar Scholtz European Bank Equity Analyst.

Scholtz also said he would look for evidence that “clear and tangible steps have been taken to improve risk management” and an “indication of the long-term impact on income of an appetite recalibration for the risk”.

“I anticipate that CS will attempt to steer the conversation more towards the underlying good performance of the business,” he added.

Impact of the franchise

The Financial Times reported last week, citing sources familiar with the bank’s operations, that Credit Suisse had reduced accumulations of bonuses and other one-off reserved items, a move some analysts fear will deprive employees of their voting rights.

“Regarding the risk of an additional impact on the franchise, we and investors will be looking to see if the group has taken any steps to support earnings and capital during the quarter, which could negatively impact the future, ”Goel said.

“For example, significant reductions in compensation within the IB (investment banking), which appear to be factored into the consensus of sales analysts, as evidenced by a much lower cost-to-income ratio for (the first quarter of 2021) in the IB than in previous periods. “

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