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July 29, 2021

Credit Suisse Q2 profit shrinks on Archegos hit

Credit Suisse has reported a 78% year-on-year plunge in Q2 2021 profit, hit by losses from exposure to the collapsed hedge fund Archegos Capital, slump in trading and wealthy pulling money.

Key group metrics

In Q1 2021, the bank took a CHF4.4bn hit from Archegos.

Net profit slumped to $278.45m (CHF253m) in the quarter to June 2021 as it absorbed a further CHF594m related to Archegos’ collapse. A year ago, the net profit of the Swiss bank stood at CHF1.16bn.

When excluding significant items and Archegos, adjusted net revenues dropped 14% to CHF5.23bn from CHF6.06bn.

This was the result of lower Asia Pacific (APAC), International Wealth Management (IWM) and Investment Bank (IB) revenues, which outweighed higher Asset Management (AM) revenues and stable Swiss Universal Bank (SUB) revenues.

Adjusted operating expenses fell 6% year on year, as a result of lower variable compensation.

Group assets under management (AuM) were over CHF1.6trn at the end of June 2021, down from CHF1.4trn a year earlier. This was driven by net asset outflows of CHF4.7bn.

Net asset outflows in APAC, due to proactive derisking, and IWM, offset inflows in SUB and AM. However, Wealth Management AuM reached a record CHF853bn.

Divisional performance

SUB’s adjusted pre-tax income, excluding significant items, of CHF592m was 13% higher than the previous year.

The rise was attributed to a release in provision for credit losses and lower adjusted operating expenses.

Adjusted net revenues dipped 1% to CHF1.33bn. Net new assets (NNA) of CHF0.6bn was driven by Corporate & Institutional Clients, partially offset by outflows of CHF0.9bn from Private Clients.

In IWM, adjusted pre-tax income, excluding significant items, was flat at CHF225m.

Reported net revenues rose 3% to CHF930m, including a CHF127m gain on the equity investment in Allfunds Group.

However, lower transaction and performance-based revenues led to an 11% decrease in adjusted net revenues, excluding significant items, to CHF803m.

Net asset outflows were CHF0.3bn, driven by outflows in Emerging Markets that outweighed inflows in Western Europe.

In APAC, adjusted pre-tax income, excluding significant items, dropped 13% to $178m.

Net asset outflows of $6.7bn were driven by Southeast Asia, Japan and China. This includes $4.2bn associated with de-risking measures in the second quarter of this year.

Adjusted pre-tax income, excluding significant items, increased 26% to CHF106m in AM. NNA of CHF1.3bn was the result of inflows from traditional and alternative Investments. This was offset by outflows in investments & partnerships.

IB saw adjusted pre-tax income, excluding Archegos, slumping 39% to $601m.

Revenues in Fixed Income Sales & Trading business plunged 33%, while Equity Sales & Trading revenues, excluding Archegos, dropped 17%.

Archegos fallout

The Archegos saga saw many executives of Credit Suisse departing, including IB CEO Brian Chin and chief risk and compliance officer Lara Warner.

The bank also nixed executives’ bonuses and reduced its dividend by two-thirds to CHF0.10 per share after the hit.

This adds to the bank’s woes that is already in troubled waters from exposure to now-insolvent Greensill Capital.

Credit Suisse was a key funding source for the British financial services firm. It was associated with selling around $10bn worth of Greensill-created securities through its AM unit.

It froze all funds linked with Greensill after the securities lost insurance coverage.

Last month, Reuters reported that Credit Suisse, dealing with the fallout from the collapse of clients Archegos and Greensill, may seek a merger with rival UBS to overhaul the business.

Credit Suisse Group CEO Thomas Gottstein said: “We take these two events very seriously and we are determined to learn all the right lessons. We have significantly reduced our RWA and leverage exposure and improved the risk profile of our Prime Services business in the Investment Bank, as well as strengthened the overall risk capabilities across the bank.

“Our underlying business performance remains solid with a record level of assets under management in our Wealth Management and Asset Management businesses, supporting strong growth in recurring commissions and fees.”

Archegos probe finds failure but no fraud

Meanwhile, in a separate statement, the bank said that a probe into the Archegos case revealed failure to manage risk effectively. However, it could not find instances of business and risk personnel engaging in fraudulent, illegal conduct or ill intent.

The probe was commissioned by the bank’s board and supervised by its special committee.

The investigation also did not find the architecture of risk controls inadequate, or the existing risk systems failing to run sufficiently to flag risks.

In this aspect, actions were taken on 23 individuals, including the dismissal of nine employees and monetary penalties worth around $70m in aggregate.

“The investigation found a failure to effectively manage risk in the Investment Bank’s Prime Services business by both the first and second lines of defense as well as a lack of risk escalation,” the independent external probe report released by Credit Suisse said.

 

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