Banks warn of “substantial losses” if they exit positions in large US hedge funds

Pedestrians will pass a bank branch of Credit Suisse Group AG in Biel on Monday, February 15, 2021.

Stefan Wermuth | Bloomberg | Getty Images

LONDON – Credit Suisse and Nomura on Monday warned of “significant” declines in first quarter results after they started exiting positions in a large US hedge fund that defaulted on margin calls last week.

Although neither Credit Suisse nor Nomura named the fund, it has been widely reported that Archegos Capital Management is the firm associated with the fire sale.

In a trading update before the market opened, Credit Suisse announced that a number of other banks were also affected and had begun to leave their positions with the unnamed company. The Zurich-based lender’s shares fell more than 15% during afternoon trading after the announcement.

“While it is premature at this point to quantify the exact size of the loss from this exit, it could be very significant and material to our first quarter results despite the positive trends announced in our trade balance earlier this month.” , so Credit Suisse said. It added that it would provide another update on the matter “in due course”.

A margin call occurs when a broker demands that an investor deposit more money into a margin account, which allows them to invest money borrowed from the broker to bring it down to a minimum required amount. The investor must then either pay into the account or sell part of the assets held in it.

Nomura also issued a trading update on Monday warning of a “significant loss” at one of its US subsidiaries as a result of transactions with a customer in the US. Japan’s largest investment bank said it was assessing the potential scale of the loss, which is estimated at $ 2 billion. Their stocks fell more than 16% on Monday.

“This estimate may change depending on how transactions are conducted and fluctuations in market prices,” the bank said.

“Nomura will continue to take the appropriate steps to address this issue and make a further disclosure once the impact of the potential loss is determined.”

Archegos Capital Management had to liquidate positions late last week. The moves of the multi-billion dollar US family office founded by former Tiger Management stock analyst Bill Hwang sparked a wave of selling pressure on Friday, with US media stocks and Chinese Internet ADRs taking the brunt.

A trader who wanted to remain anonymous told CNBC this weekend this Credit Suisse – Together with Goldman Sachs, Morgan Stanley and Deutsche Bank, Archegos had to liquidate a number of positions.

CNBC reached out to Archegos Capital over the weekend but calls and emails were not returned.

Johann Scholtz, an equity analyst at Morningstar, told CNBC on Monday that Archegos could be more exposed to the banking sector.

“But I think the real question is to what extent banks have hedged their risks, and it seems that Nomura and Credit Suisse’s risk management may not have been as strict as it could or should have been, which I think explains that This morning their stock prices changed a lot, “he added.

Troubled times for Credit Suisse

The latest developments have been recorded for Credit Suisse in a turbulent 18 months. Earlier this month, the bank announced a restructuring of its wealth management business and a suspension of bonuses to contain the damage from the collapse of UK supply chain finance firm Greensill Capital.

Credit Suisse’s wealth management unit held $ 10 billion in corporate funds and found that some investors had threatened legal action.

In February 2020, former CEO Tidjane Thiam resigned after a spy scandal that gripped the bank in 2019. Thiam claimed he was unaware of the surveillance of two former colleagues, including the late asset management chief Iqbal Khan.

Bank of America downgraded Credit Suisse shares to neutral on Monday and lowered its profit and buyback forecast for 2021 by 500 million Swiss francs ($ 533 million).

Bank of America analysts suggested that this recent setback “may be too big a problem for the company to see through the normal course of business.”

“After the series of issues the group has faced over the past several months with Greensill, mortgage-backed securities litigation and a hedge fund write-off, we believe that its capital cushion has likely been reduced to the point where its buyback was directly affected is “they said added.

Scholtz also pointed out the numerous problems at Credit Suisse, including the bank’s previous involvement in Wirecard and Luckin Coffee, both of which were embroiled in fraud scandals over the past year.

“It really seems like Credit Suisse is going to hit a pothole in the road,” he said.

“While we have consistently highlighted the value we have seen at Credit Suisse, this really is a pause for thought in the sense that it is really the latest in a litany of problematic engagements.”

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