The bank is struggling with the aftermath of the multi-billion dollar twin debacle involving the Archegos hedge fund and the Greensill funds.
(Photo: Reuters)
Zurich Credit Suisse is making an extraordinary loss before taxes of up to 1.6 billion Swiss francs (around 1.5 billion euros) in the fourth quarter of 2021. The major Swiss bank announced this in a profit warning on Tuesday. Accordingly, the bank has to set aside an additional CHF 500 million for legal disputes. In addition, there was a significant decline in income from the trading business. In addition, Credit Suisse writes down CHF 1.6 billion on the value of the company.
Credit Suisse had already announced the write-downs in the third quarter of 2021. What is new, however, is that there is no profit left in the fourth quarter due to the litigation and weak trading business to mitigate the effects of the billions in write-downs. This is so-called goodwill, unrealized goodwill that the bank has accumulated through acquisitions above market value.
The investment bank accounted for CHF 1.5 billion of the depreciation and the Asia subsidiary for CHF 100 million. Credit Suisse scaled back risk at the investment bank after the collapse of hedge fund Archegos cost the bank more than $5 billion. In addition, Credit Suisse has left its prime brokerage business, i.e. the trading business with hedge funds, and has referred the customers to BNP Paribas.
Both have a negative impact on the division’s future earnings prospects, which made it necessary to write off goodwill. The bank has also reduced risks in its Asian subsidiary and scaled back its lending to rich Asians. This also dampens the prospect of recurring income and weighs on company value.
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The additional litigation expenses were necessary because the bank settled a number of legacy cases. The bank recently reached an agreement in the scandal surrounding a multi-billion dollar fraud with so-called tuna bonds, which the bank had issued to the detriment of the African state of Mozambique.
Credit Suisse also struck a deal with wealthy clients in Turkey who lost millions in fraudulent transactions after a lira collapse. But even with the old cases, there are still open procedures: The bank is still in a clinch with the Georgian ex-president Bidsina Ivanishvili, who is demanding hundreds of millions of dollars from the bank because of the scandal surrounding the former customer advisor Patrice Lescaudron.
The bank recently increased the pace of resolving old legal disputes as it faces new investor lawsuits due to the collapse of the Greensill fund. She has also sold properties worth CHF 225 million to partially offset the provisions.
Analysts are surprised
Nevertheless, the renewed loss of billions is not well received on the market. In a recent analysis, Vontobel analyst Andreas Venditti writes that the pre-tax loss is twice as high as expected. A decline in trading income was no surprise. Nevertheless, one was probably too optimistic about the savings measures of the bank. “Credit Suisse continues to underperform the competition,” says Venditti.
The profit warning comes just a week after the resignation of the board chairman António Horta-Osório. After only eight months in office, he had to resign for violating quarantine rules. Credit Suisse is struggling with the aftermath of the multi-billion dollar twin debacle surrounding the Archegos hedge fund and the Greensill funds. Horta-Osório’s successor, Axel Lehmann, now wants to bring calm back to the bank – and is apparently also cleaning up the balance sheet.
However, the financial stability of the bank is not in question: According to Credit Suisse, the ratio of common equity Tier 1 capital (CET1) should exceed the target of 14 percent by the end of 2021. The leverage ratio (Tier 1) should be over six percent. The bank intends to publish the detailed annual financial statements on February 10th.
More: Credit Suisse exchanges the President – Lehmann replaces Horta-Osório.