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Credit Suisse's (CS) Outlook Downgraded on Archegos Default

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Amid concerns about the company’s risk management framework, S&P Global Ratings, a division of S&P Global Inc. (SPGI - Free Report) , modified the outlook of Credit Suisse Group (CS - Free Report) to negative from stable.

Also, the long- and short-term issuer credit ratings on its primary operating bank, Credit Suisse AG and the group’s subsidiaries, were affirmed at A+/A-1. Additionally, the ratings agency affirmed the group’s non-operating holding company, Credit Suisse Group AG’s long-term issuer credit rating at BBB+.

The rating agency took this action as a fallout from the U.S. based hedge fund, supposedly Archegos Capital Management, defaulted on margin calls made last week by Credit Suisse, which thereafter reported a possibility to absorb material losses for its concentrated prime brokerage exposures to the same.

Some of the other banks that were affected by the default linked to Archegos Capital Management are Deutsche Bank (DB - Free Report) and Nomura Holdings (NMR - Free Report) . Deutsche Bank's exposure to the fund was very limited in comparison to others. Per a Bloomberg article, the bank did not incur any losses and is in the process of managing its position. On the other hand, Nomura estimates the amount of the claim to be nearly $2 billion based on the market prices as of Mar 26.

Rationale Behind Ratings

The negative outlook reflects the glitches in Credit Suisse’s risk management system and potential financial risks from the exposure to Greensill group as well.

Credit Suisse is one of the highly exposed banks to the U.S. hedge fund. Budding material losses from a single client exposure dawns upon Credit Suisse’s poor risk management quality, risk appetite as well as inadequacy in risk return profile. Credit Suisse’s risk profile remains complicated, and aggravates both financial and non-financial risks due to its investment banking and asset management activities.

S&P Global Ratings already reflected this in its evaluation of the group’s risk position as moderate and business profile as adequate. The likely U.S. hedge fund loss, subsequent to the recent shuttering of four supply-chain funds connected to Greensill, raises speculation about Credit Suisse’s exposure concentration management.

Credit Suisse’s relationship management with the U.S. hedge fund and Greensill group has potential to tarnish the bank’s reputation, which was already affected during the high-profile administration issues last year, ending with its CEO’s exit.

S&P Global Ratings anticipates that Credit Suisse’s financial turmoil might remain restrained, despite the risks because it believes in its capacity to absorb the negative financial impacts of the loss. Despite speculating that the accumulated likely losses related to both the events might impact the group’s 2021 results materially, the credit agency believes the group can report sound earnings and remain profitable holistically.

Credit Suisse records strong capital ratios, as per the rating agency’s projection of the group’s risk-adjusted capital ratio (RAC) of 12-13% by 2022, which is higher than majority of its peers. Currently, the rating agency opines that a ratio below 10% is highly unlikely.

When Can the Rating be Upgraded/Downgraded?

S&P Global Ratings can lower the ratings on the group in the near term, if its analysis reflects risk management deficits and it infers that the group’s risk-return position is not sufficiently represented in the current rating.

Moreover, the ratings can be trimmed if new substantial legal risks arise or the regulatory inspections into Credit Suisse’s business relations disclose any deterioration in fundamental management controls and governance. Finally, litigation costs, credit losses and fair-value alterations for loans majorly surpassing the credit agency’s base-case projections, resulting in lower than 10% RAC ratio, might also lead to pared down ratings.

Credit Suisse’s outlook can be revised to stable over the upcoming 12-24 months by the credit agency, if it is determined that any jeopardy arising from the U.S. hedge fund and Greensill group is adequately reflected in the group’s rating and that its risk management and governance framework are discerning and in tandem with its peers.

Price Performance & Zacks Rank

Over the past six months, shares of Credit Suisse have gained 10.9%, underperforming the 46.5% rally of the industry it belongs to.

Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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