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Archegos sell-off hurts Credit Suisse image; Nomura can handle hit – analysts

Credit Suisse Group AG and Nomura Holdings Inc. are facing large losses due to exposure to the Archegos Capital sell-off, with analysts warning that the Swiss bank faces further reputational risk given that it was ensnared in this month's Greensill Capital (UK) Ltd. saga.

Nomura, which is Japan's largest broker and investment bank, and Credit Suisse acted as prime brokers for Archegos, and are seen as the most exposed to $20 billion stock used as collateral by the U.S. hedge fund, after it reportedly defaulted on margin calls. Other leading global investment banks including The Goldman Sachs Group Inc., Morgan Stanley, UBS Group AG and Deutsche Bank AG are also impacted, according to media reports.

With the financial hit to Credit Suisse to be confirmed, the bank's shares were down more than 16% in mid-afternoon trade in Zurich on March 29, while its bond spread widened after the news of the Archegos exposure was announced. The news comes as Switzerland's second-largest bank by assets still grapples with repaying investors in four supply-chain funds linked to Greensill, the collapsed U.K. specialty finance company.

"It's been a bad month for Credit Suisse," Tom Kinmonth, a fixed income strategist at ABN Amro, said in an interview. After the Greensill hit at the start of March, the Swiss group was already the worst performer in the euro-denominated senior bond index with the bank's senior bonds widening by 10 basis points over the last month while the rest of the index stayed stable, Kinmonth said in a March 29 note. "The news today will continue exert more negative sentiment towards Credit Suisse," he said.

Reputational risks

In a trading update March 29 Credit Suisse warned of a "highly significant and material" loss related to the exit of its positions from an unnamed U.S. hedge fund that would affect first-quarter earnings despite the good business progress made in 2021.

"In our view these events overshadow the bank's otherwise positive operating trends over [the first quarter] and pose both financial and reputational risks," ING senior credit analyst Suvi Platerink Kosonen said in a March 29 note.

Whilst Credit Suisse' total exposure to Archegos is not yet known, the fact that the bank has issued a profit warning about its first-quarter results "is concerning and highlights the challenges of risk management, particularly with respect to any leveraged exposures and single-name concentrations, as potential losses can be material and harmful to the financial position of a bank," Maria Rivas, senior vice president at the global financial institutions group of DBRS Morningstar said in a written comment. "Their profit warning comes along with uncertainty around their exposure to Greensill Capital and potential litigation and reputational risk as a result of the wind down of several supply-chain funds a few weeks ago," Rivas said.

In the current environment, especially in Europe, partly due to the low interest rates, a lot of banks are taking more risks to get better returns for their clients and "are getting hit again and again," Kinmonth said on the phone.

Credit Suisse did not disclose the amount of the expected loss related to the Archegos sell-off but according to two sources close to the bank, cited by the Financial Times, the loss is estimated in the range of $3 billion to $4 billion.

Nomura can handle losses

Earlier on March 29, Nomura flagged a possible $2 billion loss at one of its U.S. units. The Japanese group did not provide further details but its share price closed more than 14% down on March 29.

Analysts believe that Nomura will be able to absorb the $2 billion shock given the company's profitability. On Feb. 3, the firm posted a 72.4% year-over-year growth in net profit in the fiscal third quarter, citing strong markets trading and investment banking business. Nomura is also on track to achieve its ¥140 billion cost reduction target by March, one year ahead of the original plan announced two years ago.

Nomura is likely to recognize the $2 billion net exposure a bottom-line loss in its fiscal fourth quarter ending March 31, according to a Morningstar Equity Research note. The company is also expected to remain profitable for the full fiscal year even if the losses are proven to be larger than estimated.

"The firm is likely to maintain its large U.S. operation while continuing to focus on business areas where it has a clear advantage or niche, such as mortgage-backed securities or cross-border M&A involving Japanese buyers acquiring U.S. targets," the note read. "However, the firm may tighten its willingness to take risk in some areas where it has recently been aggressive, such as U.S.-listed equity options, in our view, if it concludes that potential downside risks are larger than it previously estimated."

S&P Global Ratings said it will review Nomura's risk management system from the viewpoint of credit concentration and validity of hedging, if the loss arises from a single client, it said in a March 29 note.

As of March 26, US$1 is equivalent to 109.59 Japanese yen.