New chairman may get Credit Suisse out of trouble, but earnings and share price are in jeopardy


After a decade under the chairmanship of Urs Rohner, a new era dawns at Credit Suisse Group AG. But new boss António Horta-Osório faces a difficult task as the bank continues to deal with the fallout from the crises at Archegos Capital and Greensill Capital (UK) Ltd., which analysts say could hurt profits over the course of the action and reputation of the lender for the foreseeable future.

The Swiss bank will end up with more than $ 5 billion in losses from the sale of shares in US family office Archegos and still has to recover around half of the $ 10 billion in assets held in funds linked to the company from finance the now insolvent Greensill supply chain. he said in his latest results report.

“We would have liked you to have had a different kind of farewell,” said Severin Schwan, non-executive vice president of Credit Suisse. Rohner at the annual general meeting on April 30, adding that it is “painful” to see the longtime president retire at a time when the lender grapples with “unjustifiable losses” in its banking units investment and asset management. Both scandals sparked resizes, bonus cuts and management changes.

Rohner’s 10-year tenure as president has been marred by a host of controversies, including legal battles, hefty fines and a damaging espionage case. Under his chairmanship, Credit Suisse shares lost more than 73% of their value. “Rohner was more than asleep at the wheel,” David Herro, vice chairman of Harris Associates, a major investor in Credit Suisse, told reporters. Financial Time.

New chairman Horta-Osório spoke of “difficult times and difficult decisions” ahead and promised an in-depth review of Credit Suisse risk management, culture and strategy. In an April 23 interview with the FT, a week before taking up his new post, the former CEO of Lloyds Bank said he was not worried and “has a clear idea of ​​what needs to happen” within the Swiss group.

“In our opinion, Horta-Osório brings international experience and a track record for dealing with important issues at Lloyds, ”said Maria Rivas, senior vice president of DBRS Morningstar’s global financial institutions team, in an email, referring to The successful recovery of the British bank after the crisis by Horta-Osório.

“However, he will have to prove that he is able to restore the confidence of shareholders and investors in the risk management of the group by implementing the appropriate changes, which is not an easy task in a large and complex institution. like Credit Suisse. “

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Difficult start

The fact that the Greensill and Archegos events occurred within weeks of each other indicates a systemic problem in Credit Suisse’s compliance and risk management, Daniel Regli, senior research analyst at Octavian told S&P Global Market Intelligence. . Fallout from the two cases could cause “lasting damage” to the bank’s stock price, he said.

Credit Suisse expects further Archegos-related losses of 600 million francs in the second quarter, after recording a charge of 4.43 billion francs in the first, and the reduction in its blue-chip brokerage business could result in loss of activity. The bank is “certainly at risk” of losing clients as its ability to maintain a large, blue chip brokerage portfolio is called into question, said Octavio Marenzi, CEO of capital markets management consultancy Opimas, in an e- mail.

However, clients of investment banking and asset management units, in general, should be largely spared, Marenzi noted. In addition, the first quarter results showed strong income from investment banks and strong net growth in new assets in asset management, Rivas said.

First-quarter Credit Suisse investment banking income grew 80% year-on-year, while asset management income grew 60% and last 12 months net new assets grew 5%. %. The group’s wealth management business, whose first quarter revenues grew 7% year-on-year, also contributed to the 31% increase in total group revenues.

Without the charge of Archegos, the group would have recorded a profit before tax of 3.6 billion francs in the first quarter, almost four times higher than the result of 946 million francs the previous year, which “testifies to the profit power of Credit Suisse ”. CEO Thomas Gottstein said in a earnings release.

Moody’s considers Credit Suisse’s ‘below expectations’ net loss in the first quarter of CHF 252 million to be credit neutral, as the strong underlying business performance offset more of the loss from Archegos and mitigated “the corresponding decline in the bank’s capital and leverage ratios,” analyst Michael Rohr said in a written comment.

“Second order effects”

Despite the bank’s strong underlying results and diversified franchise, analysts at Berenberg, Moody’s, CFRA and Morningstar expect Credit Suisse’s medium-term performance to come under pressure. The “second order effects” of the Archegos coup, as well as the recent capital increase of 1.76 billion Swiss francs, or 8% dilution of Credit Suisse’s EPS, will weigh on capital, hamper future payments of dividends and lead to lower income, Berenberg analysts said in an April 26 note. They added that the stock is unlikely to recover anytime soon.

Morningstar equity analyst Johann Scholtz and Moody’s credit analysts have warned of potential future losses from closed Greensill funds. Three Greensill exposures amounting to CHF 2 billion will be particularly difficult to recover and, although the ultimate risk lies with asset management clients, if Credit Suisse does not provide indemnification there will be “a risk. obvious reputation and litigation “for the group, said Scholz.

CFRA equity analyst Firdaus Ibrahim and Moody’s analysts questioned Credit Suisse’s ability to meet its Objective of 10% to 12% medium-term return on tangible equity. Further losses linked to Archegos and Greensill could reduce the bank’s ability to “generate profits in line with the levels of previous years” and put its financial targets at risk at least in 2021, said Moody.

Consensus forecasts show an expected decline in Credit Suisse’s ROTE, revenue and Tier 1 capital ratio levels in 2021, with ROTE estimates remaining below 10% by 2023.

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