Investors in Swiss banking giant Credit Suisse are demanding answers about its risk-taking after the bankruptcies of British financial firm Greensill and US hedge fund Archegos bled it for billions of dollars.
Shareholders will pick apart quarterly earnings data later this week seeking clarity over how the losses occurred and if more could be lurking on the horizon.
“Obviously, there is a risk management problem,” said Dusan Isakov, a corporate finance and governance professor at Fribourg University.
Switzerland’s second-largest bank was heavily invested in Greensill, a firm specialised in short-term corporate loans via a complex and opaque business model, and was forced to suspend four funds after the firm declared insolvency last month.
Meanwhile a sudden share selloff by Archegos Capital Management triggered upset on financial markets that hit Credit Suisse particularly hard.
The Archegos meltdown alone inflicted a 4.4-billion-Swiss franc (3.9 billion euros, $4.7 billion) charge on Credit Suisse’s first-quarter earnings, prompting ratings agency S&P to review but ultimately maintain its creditworthiness.
And the bank has already said it expects to book a pre-tax loss of 900 million Swiss francs when it presents its quarterly results Thursday.
– ‘Sword of Damocles’ –
Analysts with the Zurich Cantonal Bank (ZKB) expect Credit Suisse’s results to offer only limited answers on its oversized exposure in the Greensill collapse.
That would leave questions around the debacle and in particular compensation to investors hanging over the bank like a “sword of Damocles” for the rest of the year, they warned.
So far Credit Suisse has promised to return $4.8 billion to investors from its four Greensill funds — less than half the original amount — and analysts have warned that angry clients could begin moving their money elsewhere.
The bank’s early April announcement of two internal investigations into the crisis has not stemmed calls for more accountability.
In an open letter published on his website, US Senator Sherrod Brown, who heads the Senate Banking Committee, listed a long line of questions over the Archegos collapse, demanding a response by April 22.
One of his questions focused on “coordination with other banks to sell, or to refrain from selling, stocks related to Archegos transactions”.
In an interview with Swiss newspaper NZZ, Credit Suisse chief Thomas Gottstein insisted that the losses linked to the fund marked “an isolated event,” vowing that the bank would allow for the “necessary consequences, with no taboos.”
– Fear of ‘landmines’ –
The Greensill and Archegos shocks have meanwhile revived long-standing criticism of Credit Suisse’s commercial banking division.
“We have been warning about the risks from trading in derivative products since 2009, since the financial crisis,” Karin Landolt, spokeswoman for major Swiss shareholder organisation Actares, told AFP earlier this month.
The small size of the commercial banking division, which deals in mergers and acquisitions, initial public offerings, and prime brokerage investments, raised fears of risky behaviour to compete against larger US banks.
The division last year saw its revenues soar 19 percent to $10.2 billion.
By comparison, the bank’s more conservative wealth management division saw its revenues shrink eight percent to 13.6 billion Swiss francs.
Although speculative fund failures are not uncommon and Archegos hit other financial firms, Isakov said Credit Suisse “either… lent out too much money, or they poorly evaluated the risks.”
Combined with the bank’s repeated ignoring of warning signs on Greensill, this showed that “there is clearly a governance issue,” Isakov said.
The massive losses could take a heavy toll on Credit Suisse’s reputation, which was just beginning to mend after a massive scandal over espionage against former employees pushed former chief Tidjane Thiam to resign early last year.
Beyond the hard numbers, the ZKB analysts said Credit Suisse’s main task on Thursday will be to calm fears of future problems.
The bank, they said, needs to convince investors there were no further “landmines slumbering in its books” ready to explode.
