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Credit Suisse CEO defends investment bank unit in wake of Archegos sell-off

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Credit Suisse CEO defends investment bank unit in wake of Archegos sell-off

Credit Suisse Group AG will conduct a review of its investment bank after the Archegos Capital sell-off but it is "a bit unfair" to say that everything is broken in that unit, CEO Thomas Gottstein said April 22.

The Swiss group plans to downsize its prime financing and prime brokerage businesses, and will review the "overall size and look" of the investment bank as a result of the losses linked to the U.S. hedge fund.

"We have some tremendous franchises in capital markets, in M&A, in [securitized products], just to name a few ... and we've had significant market share gains in various areas," Gottstein said during a first-quarter earnings presentation.

Credit Suisse shares plummeted after the release of its first-quarter figures and were trading 6.10% lower than the prior-day close at 12:40 p.m. Zurich time.

Despite strong underlying earnings, Credit Suisse slipped to a first-quarter pretax loss of CHF757 million from a year-ago profit of CHF1.20 billion as it booked a CHF4.43 billion charge related to its exposure to Archegos. Analysts at UBS said the pretax loss was 18% lower than originally expected due to cost of risk releases in the first quarter.

"The issues with the U.S. hedge fund fully erased the benefits of the extremely strong underlying performance of Credit Suisse in [the first quarter]," ING credit analyst Suvi Platerink Kosonen said in an April 22 note.

Excluding the first-quarter Archegos charge, the bank's first-quarter pretax income would have climbed to roughly CHF3.60 billion from CHF946 million a year ago, Credit Suisse estimates show.

Net group revenues rose 31% year over year to CHF7.57 billion despite the Archechos charge. The growth was primarily driven by the 80% year-over-over surge in investment bank revenues, which increased to $3.89 billion in the first quarter, from $2.16 billion in the same period of 2020. Excluding the charge, first-quarter net group revenues amounted to CHF7.43 billion

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Nevertheless, the investment bank unit's roughly $2.20 billion pretax income was erased by the Archegos charge and the unit reported a first-quarter pretax loss of $2.56 billion. Credit Suisse expects another Archegos-related charge of roughly $600 million in the second quarter of this year with 97% of positions already sold off, according to the bank.

Credit Suisse is currently running a strategic review focused on resizing and de-risking its prime services and is working closely with regulators on the review of the Archegos case, Gottstein said. Swiss financial regulator FINMA as well as the U.S. Securities and Exchange Commission are looking into the Archegos situation, he said.

By the end of 2021, Credit Suisse will also work to reduce the investment bank's leverage exposure by at least $35 billion and align the unit's risk-weighted assets "to no more than end-2020 levels." Investment bank RWAs stood at $88.42 billion in 2020, according to Credit Suisse's annual report.

Gottstein noted the group has made progress in de-risking the investment bank unit in the period 2015 to 2017. "We reduced significantly our leverage and RWA exposures, exited a large part of macro and really reduced our footprint in the investment bank to make it more profitable ... and that clearly addressed some of the structural issues we had," the CEO said.

The first-quarter results show the investment bank is "really on the right track" given that it outperformed most of its global competitors by revenue growth in the period, he said.

Isolated case

Gottstein said he hopes Archegos is an isolated case. "Historically, the prime business has not been subject to major losses," he said. "But we are obviously reviewing the entire bank now, just to make sure that our risk processes and systems are where they should be," he said.

The Archegos margin call was "an exceptional event," CFO David Mathers said during the presentation. "The last time the industry has seen anything like this was LTCM, in terms of its size and consequence. And it is an industry-wide issue," Mathers said, referring to the 1998 collapse of U.S. hedge fund Long-Term Capital Management.

Mathers denied that Credit Suisse has been slower to sell compared to peers exposed to Archegos. "We reduced our position in a lawful and orderly manner with respect to the challenge we faced... As far as I can tell, in terms of looking at the prices we achieved compared to the other prime brokers, the exit prices were broadly similar over the period of time," the CFO said.

As a result of the Archegos loss, Credit Suisse has cut variable compensation by CHF109 million across all units in the first quarter but it was "particularly hard" in the investment bank, which has the largest bonus pool in the group, Gottstein said. This is just one quarter out of four but the bank will "have to take the right hard look at variable compensation given the loss we had", he said addressing future cuts.

The bank is also still dealing with the aftermath of the closure of four supply chain funds linked to British specialty finance firm Greensill Capital (UK) Ltd. earlier this year. To date, Credit Suisse has recovered $5.4 billion of the roughly $10 billion of assets held in the funds at the time of their suspension, and has returned $4.8 billion to investors. FINMA and U.K.-based regulators are also looking into the Greensill case, Gottstein said.