Billions in losses for Credit Suisse

A customer’s gambling is very expensive for the Swiss bank. Two top managers have to go. Bonuses are canceled; the dividend will be cut.

Not only the New York branch of Credit Suisse looks like a construction site.

Dhe debacle surrounding the New York investment firm Archegos Capital Management tears a deep hole in Credit Suisse’s (CS) income statement. As the major Swiss bank announced on Tuesday, it expects a burden of 4.4 billion francs (4 billion euros). As a result, the bank will close the first quarter of 2021 with a pre-tax loss of around CHF 900 million. CS had granted the hitherto rather unknown Archegos Capital large-scale loans, which its owner Bill Hwang used for high-risk bets on American and Chinese stocks.

But the gamble went completely wrong. Prices fell and Hwang was unable to meet demands for additional security deposits. As a result, CS and a number of other banks threw the stocks on the market, which had been deposited as collateral, but which are now significantly less valuable, in the course of an apparently largely uncoordinated emergency maneuver. After everything that has become known about this case so far, the Swiss are by far the hardest hit by the storm of depreciation.

Personal consequences

This now has personnel consequences on the top navigating bridge of the second largest Swiss banking group. The head of the CS investment bank, Brian Chin, and the risk manager Lara Warner have to leave the bank with immediate effect. The investment bank, which is responsible for the expensive and image-damaging failure in America, is now run by Christian Meissner. The 51-year-old Austrian, who was briefly traded as a possible successor to the former UBS boss Sergio Ermotti, has been working for Credit Suisse since last fall.

Joachim Oechslin, who most recently worked as Senior Adviser for the CS CEO Thomas Gottstein, takes on the role of Chief Risk Officer. Responsibility for compliance – i.e. observing regulations and laws – is now to be managed separately again, after the unit was merged with risk management last year. Thomas Grotzer will now be responsible for compliance.

CS GROUP N

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To the detailed view

The shareholders are also feeling the impact. The Board of Directors has decided to end the current program to buy back own shares. In addition, the dividend for 2020, which should be CHF 0.29 per share, will be reduced to CHF 0.10. This is intended to secure the capital base, which will melt slightly due to the expected losses. Since the Archegos risks became known, the CS share price has lost almost a fifth. On Tuesday, the stock was little changed in early business at 10.14 Swiss francs. According to CS, the core capital ratio will be 12 percent and thus remain above the legal minimum of 10 percent.

The debacle also has consequences for management salaries. The Board of Directors has decided to withdraw the proposals for the remuneration of the top executives that had already been submitted to the shareholders’ meeting on April 30th. The bonuses for 2020 and 2021 will now be reduced by just under CHF 41 million. The Chairman of the Board of Directors Urs Rohner, who was to be paid 4.7 million francs for the past twelve months, waived 1.5 million francs. After the shareholders’ meeting, Rohner will be leaving as planned, thus anticipating any requests for resignation from shareholders.

Also at Greensill

The chairman of the board, Thomas Gottstein, who only moved to the top a year ago, is allowed to remain in office. According to the announcement, he was “determined to face this situation. We shall learn serious lessons from this ”. Of course, the Board of Directors does not rely solely on Gottstein’s reappraisal. The supervisors have initiated investigations that will be carried out by external experts. These apply to both the Archegos and Greensill cases.

Credit Suisse lured institutional clients such as insurance companies and wealthy private clients into supposedly secure supply chain financing funds from Greensill, which now have to be wound up. This could result in losses in the billions for customers and CS itself. The bank plans to deliver a separate update for this in the next few days.