Credit Suisse raises $2bn and shrink hedge fund arm after Archegos collapse

Credit Suisse is raising $2 billion from investors and cutting the hedge fund unit at the centre of the Archegos Capital Management losses as chief executive Thomas Gottstein seeks to recover from one of the most turbulent periods in the bank’s recent history.

Credit Suisse, which has exited about 97 per cent of its exposure to Archegos, expects a related 600 million franc ($654m) loss in the second quarter, taking its total hit from the collapse to about $5.5bn. In response, its cutting about a third of its exposure in the prime business catering to hedge fund clients, while strengthening capital with the sale of notes converting into shares.

Gottstein is battling to rescue his short tenure as chief executive after Credit Suisse was hit harder than any other competitor by the collapse of Archegos, the family office of US investor Bill Hwang. The timing of the blow-up could hardly have been worse, coming just weeks after Credit Suisse found itself at the centre of the Greensill Capital scandal, when it was forced to suspend investment funds. While seeking to placate investors hurt by the losses, he also now faces the fresh challenge of navigating enforcement proceedings announced by Swiss regulator Finma on Thursday.

The double whammy wiped out a year of profit and left Gottstein fighting to demonstrate to incoming Chairman Antonio Horta-Osorio that he’s of the right mettle to carry the bank through the volatility which has left investors nursing losses and questioning its strategy and controls. Having taken on the position more than a year ago, the chief executive had stumbled over other hits before Greensill shattered what was supposed to be a new era of calm.

The two scandals have left Mr Gottstein standing while many once powerful members of his management board had to leave. Gone are investment banking head Brian Chin and chief risk officer Lara Warner, along with a raft of other senior executives including equities head Paul Galietto and the co-heads of the prime brokerage business. Asset management head Eric Varvel is also being replaced in that role by ex-UBS veteran Ulrich Koerner.

The bank has also suspended its share buyback plans and cut its dividend.

Credit Suisse fell as much as 6.9 per cent in Zurich trading and was 6.1 per cent lower as of 11.19am local time, taking this year’s losses to about 23 per cent.

The bank plans to reduce risk at the investment bank, including cutting about $35 billion of leverage exposure at the prime brokerage unit – which services its hedge fund clients, Mr Gottstein said. That’s about a third of its total exposure.

“Although capital has been mainly addressed, we still see questions remaining in terms of strategy and risk management,” JPMorgan Chase analysts wrote in a note to investors. “Capital has been clearly the main focus.”

The bank said the convertible notes were sold to core shareholders, institutional investors and high net worth individuals and will help bring its CET1 ratio – a key metric for capital – nearer to its 13 per cent target. That number had dropped to 12.2 per cent at the end of the first quarter.

In addition to the enforcement proceedings, Credit Suisse said that the Swiss regulator has told it to hold more capital to guard against losses by taking a more conservative view of its risk. The bank increased its assets weighted according to risk for both Archegos and Greensill.

The Greensill debacle is also far from over. Credit Suisse has so far returned about half the $10bn in investor money held by the funds at the time of their suspension. While the bank marketed the funds as among the safest investments it offered, investors are left facing the prospect of steep losses as the assets are liquidated. Credit Suisse is leaning toward letting clients take the hit of expected losses in the funds, a source said earlier this month.

“We have good visibility for a large portion of the remaining positions,” Gottstein said. “There are three more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”

The impact for Credit Suisse from both Archegos and Greensill could add up to $8.7 billion, according to JPMorgan analysts Kian Abouhossein and Amit Ranjan.

Credit Suisse reported net revenue of 7.6bn francs for the quarter and made 4.4bn worth of provisions for credit losses.