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Credit Suisse (CS) Expects to Report Q1 Loss on Archegos Fallout

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Credit Suisse (CS - Free Report) announced that it expects to report a pre-tax loss of about CHF900 million for the first quarter of 2021 on a CHF 4.4 billion ($4.7 billion) hit. The charge relates to Archegos Capital Management, a U.S.-based hedge fund, which defaulted on a margin call made on Mar 26.

The charge will offset all the profits bagged from quite a strong quarter for investment banking businesses. Also, the company said that increased income in the wealth management unit, asset management, with particular strength in Asia Pacific division, will be eroded.

Credit Suisse has been affected the most by this blowout as it was one of the several firms that acted as prime broker for the hedge fund and carried out trades and lent money to the fund.

Nomura Holdings (NMR - Free Report) is one of the other banks to have estimated a significant impact. It projects the amount of the claim to be nearly $2 billion based on market prices as of Mar 26.

Repercussions of the Charge

Firstly, having gauged the size of financial impact, the company has planned to cut down on its capital deployment activities. Credit Suisse has reduced the proposed dividend amount for 2020 to CHF0.1 per share compared with CHF0.2926 previously proposed. Also, it has suspended the share buyback program and will not resume the same until it has regained target capital ratios and restored dividend level.

Thomas Gottstein, CEO of Credit Suisse said, "The significant loss in our Prime Services business relating to the failure of a US-based hedge fund is unacceptable.”

As a result, Brian Chin, chief executive of the investment bank, and Lara Warner, chief risk and compliance officer have stepped down from their roles. Also, Chairman Urs Rohner’s proposal to forgo CHF1.5 million in chairman fees has been approved by the board of directors. Bonuses for the senior management have been scrapped this year.

Thirdly, Gottstein has launched an external investigation on Greensill Capital and Archegos matters “which will not only focus on the direct issues arising from each of them, but also reflect on the broader consequences and lessons learned.”, the company said.

Our Take

Involvement in two major scandals will undoubtedly dent Credit Suisse’s reputation in the global arena. Nevertheless, resolution of such issues will likely help restore investors’ confidence in the stock.

Over the past six months, shares of Credit Suisse have gained 3.7% compared with 38.9% growth recorded by the industry.

 

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

Stocks to Consider

Deutsche Bank (DB - Free Report) has witnessed upward earnings estimate revisions for 2021 in the past 60 days. Moreover, this Zacks Rank #2 (Buy) stock has gained 31% in six months’ time.

Bank Of Montreal’s (BMO - Free Report) current fiscal-year earnings estimates have moved north in 60 days’ time. Further, the company’s shares have appreciated 44.4% over the past six months. At present, it flaunts a Zacks Rank of 2.

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