Credit Suisse Surprises With $2 Billion Capital Raise, Still Has Exposure To Archegos In "Three Distinct Positions"

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by Tyler Durden
Thursday, Apr 22, 2021 - 09:25 AM

The second largest Swiss bank has been a veritable volcano of bad news in the past month, and today was no different: in the bank's earnings call, Credit Suisse Group announced it was raising $2 billion from investors in the form of convertible notes, while also suspending its share buyback and cut the dividend - news which sent the stock tumbling as much as 7%...

... while also warning of even more pain from the Archegos collapse and cutting the hedge fund unit at the center of that particular fiasco as embattled CEO Thomas Gottstein seeks to recover from one of the most turbulent periods in the bank’s recent history.

The bank said the convertibles notes were sold to core shareholders, institutional investors and high net worth individuals and will help bring the bank’s CET1 ratio nearer its target 13%. That number had dropped to 12.2% at the end of the first quarter. In addition to the enforcement proceedings, Credit Suisse said that the Swiss regulator has told it to hold more capital to guard against losses by taking a more conservative view of its risk. The bank increased its assets weighted according to risk for both Archegos and Greensill. But while the capital raise came after Finma raised the bank’s capital requirements, Gottstein said the decision was the bank’s own... because clearly Credit Suisse is on top of all internal risk management.

“This was not as a reaction to any request by Finma or any other regulator,” Gottstein said on a call with analysts. “It was our proactive view that, together with the board, we decided to issue these two mandatories and that will really help us also against any possible market weakness over the coming months.”

Additionally, Credit Suisse, which said it has exited about 97% of its exposure to Archegos - yet it's that 3% that remains problematic as the nominal value of its exposure to Archegos keeps rising and late last night hit $20BN -  said it expects a 600 million-franc ($654 million) loss in the second quarter, taking the total hit from the collapse to about $5.5 billion. In response, it’s cutting about a third of its exposure in the prime business catering to hedge fund clients, while strengthening capital with the sale of notes converting into shares.

The CEO did disclose that the bank has "good visibility for a large portion of the remaining positions" and that there are "three more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”

It was unclear which stocks those three positions represent.

For CEO Gottstein, who is battling to rescue his short tenure as chief executive officer after Credit Suisse was hit harder than any other competitor by the collapse of Archegos just weeks after the bank found itself at the center of the Greensill scandal too, the double whammy wiped out a year of profit and left Gottstein fighting to demonstrate to incoming Chairman Antonio Horta-Osorio that he’s of the right mettle to carry the bank through the volatility which has left investors nursing losses and questioning its strategy and controls.

Yet as Gottstein stays, most of his lieutenants are out: gone are investment banking head Brian Chin and Chief Risk Officer Lara Warner, along with a raft of other senior executives including equities head Paul Galietto and the co-heads of the prime brokerage business. Asset management head Eric Varvel is also being replaced in that role by ex-UBS Group AG veteran Ulrich Koerner.

As part of his hope to preserve his job, the CEO plans to reduce risk at the investment bank, including cutting about $35 billion of leverage exposure at the prime brokerage unit -- which services its hedge fund clients, Gottstein said in an interview with Bloomberg Television. That’s about a third of its total exposure, although it was unclear how many clients the move will affect and whether the hedge funds will be forced to close out positions.

Here are the full highlights of Gottstein's interview with Bloomberg's Francine Lacqua.

  • Credit Suisse Group AG’s placement of mandatory convertible notes raised almost $2 billion and has helped “take the capital discussion off the table,”
  • “We have conditional capital; that’s the best way for us to raise the equity with a short 6-month maturity. It was important for us to get to get to 13% CET1 ratio which on a pro-forma basis we now have.”
  • “With Archegos we are down to the last 3%; We have exited the positions to a large extent.”
  • “We’ve taken action in our risk organization, we have taken management changes so we have done quite a lot, still some work to do in the second and third quarter but we have taken a lot of measures.”
  • In prime brokerage business Gottstein says “our plan is to reduce leverage exposure by $35 billion by the end of the second quarter.”
  • With Greensill, “We have brought back $5.4 billion in terms of cash out of the original $10 billion, we have good visibility for a large portion of the remaining positions. There are 3 more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”
  • “If you look at our provision for credit losses it has been a very strong 10-11 years so I don’t think we have a DNA problem in terms of risk.”
  • “We’ve taken action in our risk organization we have taken management changes so we have done quite a lot, still some work to do in the second and third quarter but we have taken a lot of measures.”

To summarize, here are five key takeaways from the Credit Suisse Q1 earnings from Goldman...

  • Archegos: Loss scaled up to US$5 bn (previous: US$4.4 bn), and a 3% residual position remains.
  • Supply-chain finance funds: of the US$ 10bn of funds, held by CS clients: ~54c/$ has been reclaimed by CS, with ~48c/$ paid back to investors. CS expects this number to rise meaningfully and indicated it does not see recourse to its capital.
  • IB: (1) RWA for IB will be flat on Q4-20 (Q1-21: US$99 bn, Q4-20: US$88 bn), implying a cut of US$11 bn; (2) Leverage exposure cut of US$35 bn, driven mostly by cutting PB balances by 1/3; (3) broad review of IB operations is underway, and expected to continue through 2021.
  • Strategic review: A comprehensive review is underway across the group but with a focus on prime brokerage operations. The incoming Chairman (to start on May 1st) is expected to lead the review.
  • Outlook: 2Q-21 expectation is for a slowdown in IB, and an impact from Archegos. WM businesses should benefit from better recurring commissions and fees reflecting higher AuMs whilst NII should be stable. The bank did not see meaningful flows since the beginning of the quarter.

... and Bloomberg:

  • The performance numbers took a back seat as investors got the surprise of a $2 billion capital raising to make up for the Archegos hedge-fund collapse. The shares fell as much as 6%
  • CEO Thomas Gottstein said it was the right thing to do, to get capital concern off the table as an issue, even if the price level wasn’t particularly appealing
  • Gottstein held back on details of the bank’s risk-management review, saying he wants to wait until investigations by regulators are complete. He did point to disclosure for family offices and the bank’s absolute limits for clients as areas that need to be looked at
  • The Swiss lender also was cautious on the outlook for the investment bank, as it expects less market activity and it aims to shrink its prime-brokerage division
  • On the other pending issue, the Greensill funds, the bank said more time is needed to determine how much money can

“Although capital has been mainly addressed, we still see questions remaining in terms of strategy and risk management,” JPMorgan Chase & Co. analysts wrote in a note to investors. “Capital has been clearly the main focus.” JPMorgan analysts Kian Abouhossein and Amit Ranjan previously said that the total impact for Credit Suisse from both Archegos and Greensill could add up to $8.7 billion.