By Brenna Hughes Neghaiwi
ZURICH (Reuters) - Credit Suisse will raise over $2 billion to strengthen its capital base after flagging a further hit from the collapse of U.S. investment fund Archegos and a shrinking of the prime brokerage unit responsible for the multi-billion dollar debacle.
The demise of Archegos and another major client, British finance firm Greensill, have plunged Credit Suisse into crisis, triggering losses, sackings and bonus cuts at a time when rivals are revelling in bumper profit from trading and dealmaking.
In a further blow for Chief Executive Thomas Gottstein, Switzerland's financial regulator has opened enforcement proceedings against the bank over how it handled the risks around Archegos and Greensill.
Credit Suisse said it expects a hit of about 600 million Swiss francs ($655.81 million) for the April-June quarter after exiting most of its Archegos-related positions. A 4.4 billion hit in January-March wiped out what would have been a stellar trading period, leaving it with a slightly smaller-than-flagged pre-tax loss of 757 million francs.
Its shares fell 5.7%, with analysts pointing to the further Archegos hit and dilution caused by the issuance announced on Thursday of bonds convertible into 203 million shares.
Credit Suisse was the bank hardest-hit from exposure to Archegos, a U.S. based family office which collapsed when it could not meet margin calls on its heavily leveraged stock bets.
In response, the bank is cutting its prime brokerage business, which caters to hedge fund clients, by about a third.
Credit Suisse's shares are down over 20% so far this year and the scandals have wiped out the 50% gain its stock had clocked up since November 2020, when optimism around vaccines and a new U.S. administration buoyed European financials.
"The loss we report this quarter, because of (the Archegos) matter, is unacceptable," Gottstein said.
The Archegos blowup came weeks after Credit Suisse had to suspend investment funds linked to Greensill, creating a double whammy for Gottstein whose appointment at the end of 2019 was meant to signal a new era of calm after a spying scandal felled his predecessor Tidjane Thiam.
Switzeland's financial regulator, which is still investigating the spying controversy, said it had ordered several short-term measures to reduce the bank's risk exposure and had requested a suspension of some bonus payments.
Credit Suisse's new bond issuance will boost the bank's core capital level to around 13% from 12.2%, a level its chief financial officer said he had recommended the bank operate at "for the foreseeable future" and higher than its previous guidance.
U.S. rivals, which were quicker to exit trading positions as Archegos collapsed, produced forecast-beating profit for the first quarter. Net income at Goldman Sachs Group Inc rose nearly six-fold. Morgan Stanley disclosed an almost $1 billion loss from Archegos yet reported a 150% profit jump.
Stripping out the 4.4 billion franc first-quarter hit from Archegos and other significant items, Credit Suisse said pre-tax profit would have been 3.6 billion francs, which would have represented its best quarter operationally in at least a decade.
Highlighting the strong environment, Credit Suisse posted bumper earnings in its Asia-Pacific unit, up 154% year-on-year, and a 25% pre-tax profit rise in its Swiss business - the only two divisions unscathed by the recent Archegos and Greensill episodes.
While Gottstein has been grappling with limiting the damage to the bank's reputation and retaining both clients and staff, broader strategic initiatives have remained pending until incoming Chairman Antonio Horta-Osorio takes over on April 30.
Analysts expect the troubles - which have hit the bank's capital reserves - to impact earnings in future quarters, as lower capital reserves may limit risk appetite and impact staff and client relationships.
The bank on Thursday said it had cut compensation and benefit costs by 5% year-on-year, or 109 million francs on an adjusted basis. That represented a fraction of a massive drop in bonus accruals media had previously reported.
"In terms of employee retention (and compensation), we need to walk a balance. If we'd chose to increase compensation accruals this quarter after the bank has made a loss, I don't think that would be really acceptable to shareholders, frankly," CFO David Mathers told Reuters.
"That's understood by everybody at the bank. But clearly, there's the rest of the year to play for, and we'll see how performance goes and accrue accordingly," he said.
Investment banking posted a $2.6 billion pre-tax loss, as a 29% leap in fixed income sales and trading, 23% leap in equity sales and trading revenue, and much larger gains in capital markets and advisory failed to offset the huge hit from Archegos that the unit recorded.
Its asset management unit, which ran the $10 billion in funds linked to Greensill, saw profit dip 30% as a rise in managed assets failed to stop "significant items" pulling down revenue.
The unit, which is undergoing an overhaul, was already a source of trouble in the fourth quarter, when it was hit with a half-billion dollar impairment on a stake in another U.S. investment fund.
In April, it said it had identified $2.3 billion worth of loans exposed to financial and litigation uncertainties in its Greensill-linked supply chain finance funds.
Data from researcher Morningstar estimated asset flows into Credit Suisse's Europe-domiciled fund range dropped in March, the month it announced the suspension of Greensill-linked funds.
Total net assets and the market share of actively managed funds also fell, Morningstar estimates showed. That compared with an increase across the broader European market.
($1 = 0.9149 Swiss francs)
(Reporting by Brenna Hughes Neghaiwi; Editing by Michael Shields and Christopher Cushing)