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Credit Suisse (CS) Might Report Q4 Loss on Higher Legal Reserves

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Despite having experienced an impressive trading performance, Credit Suisse Group AG (CS - Free Report) recently announced that it expects to incur loss in the fourth quarter of 2020. This is because it is required to increase provisions for the MBIA case and other RMBS-related cases by $850 million and expects an impairment charge regarding non-controlling interest in York Capital Management.

Regarding the lawsuit with MBIA, the bank has been accused of not adhering to its promise to repurchase RMBS transactions sold by the bank and insured by MBIA in 2007. Further, over the decade, MBIA brought claims of material misrepresentations, fraudulent inducement and breach of contract.

The case went to trial in July 2019 and the decision is still pending. The rise in provisions came after a U.S. judge ordered both the parties i.e., Credit Suisse and MBIA, to submit estimates of damages related to the mortgages that were issued in 2007.

Further, the impairment charge to be faced is for Credit Suisse’s stake in York Capital Management, a global alternative investment firm, as the latter is winding down its European hedge funds business.

Some of the impact from these charges is likely to be mitigated by strong performance of the wealth management businesses on higher client activities. Also, the company informed that the investment bank continued to perform well and expects revenues to increase more than 15% year over year.

Notably, the Swiss bank will resume its share buyback program from Jan 12, 2021. In October 2020, the board had approved repurchases of up to CHF1.5 billion in 2021, with at least CHF 1.0 billion expected for the full year.

Shares of this Zacks Rank #3 (Hold) company have gained 31% over the past six months compared with 31.7% growth of the industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Since the financial crisis, banks on a global level have been consistently involved in lawsuits regarding their involvement in the sale of RMBS during the financial crisis. In 2019, U.S. Bancorp (USB - Free Report) accused Bank of America (BAC - Free Report) of contract breach related to the sale of RMBS. Per the claims, First Franklin, bought by BofA in 2006, sold defective mortgages to a $2-billion RMBS trust in 2007 and failed to inform about the problem mortgages to the trust’s investors.

Also, JPMorgan, Deutsche Bank (DB - Free Report) , Wells Fargo, Barclays, The Royal Bank of Scotlandare among other banks to have settled cases with similar accusations in the past years.

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