Credit Suisse Q2 profit misses estimates as bank pares risk after scandals

Credit Suisse Group AG reported a bigger-than-expected plunge in second-quarter profit, as the aftershocks of the Archegos Capital Management and Greensill scandals reverberate across the investment bank and wealth management businesses.
 

Net income tumbled 78% from a year earlier, dragged down by a slump in trading that was exacerbated by a $653 million Archegos-related loss. The advisory business -- a key area of strength in recent quarters -- saw revenues decline by more than a third, while the bank saw billions of outflows in Asia as it reduced ties with some clients.

Credit Suisse is working to recover from one of the most turbulent periods since the financial crisis after it was rocked by the Archegos and Greensill Capital scandals, which caused a $5.5 billion hit and hurt the bank’s reputation. Vowing reforms, new Chairman Antonio Horta-Osorio has said the scandals went beyond any he’d lived through over three-and-a-half decades in banking. The lender raised $2 billion from investors to shore up capital and a strategy review is expected later this year.

“We take these two events very seriously and are determined to learn all the right lessons,” Chief Executive Officer Thomas Gottstein said on Thursday. “We have significantly reduced our risk-weighted assets and leverage exposure and improved the risk profile of our prime services business in the investment bank.”

Credit Suisse fell as much as 5.1% and was trading 3.4% lower as of 9:37 a.m. in Zurich. It has declined about 21% this year.

The bank’s actions to pare risk including downsizing the unit that services hedge funds by a third and cutting ties with clients deemed high risk. In the second quarter, that translated to $4.2 billion of outflows across wealth clients in Southeast Asia, Japan and China. Revenue at its global trading solutions business -- a joint venture between the investment bank and wealth businesses -- also declined “in part due to our more conservative risk appetite in the investment bank.”

As part of attempts to reform the bank, Credit Suisse earlier this week said it’s hiring David Wildermuth from Goldman Sachs Group Inc. to become the new chief risk officer, replacing former risk and compliance chief Lara Warner, who stepped down among several other key executives after the scandals. Her roles will now be split. Wildermuth is the second Goldman Sachs executive to join the firm since Horta-Osorio took over, after the appointment of Joanne Hannaford as chief technology and operations officer.

Alongside second-quarter results, the bank also published the findings of its internal report into the Archegos disaster, prepared by U.S. law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. It faulted employees at the prime services unit who “systematically ignored” repeated red flags, though said no criminality was involved. The Swiss firm said it ousted nine executives and recouped about $70 million in pay, including bonus clawbacks, as it punished 23 people in all for their role in the scandal.

At the investment bank -- which was hit by the Archegos collapse -- fixed-income trading was down 33% from a year earlier, though better than the Wall Street average, as banks face a moderation in the market volatility that helped boost income since the beginning of the pandemic. Equities revenue slumped 17%, even before accounting for Archegos, compared with gains for U.S. peers.

Deal advisory revenue fell by a third. The bank has seen an exodus of more than 40 senior bankers in the dealmaking business in a brain drain that could cost Credit Suisse roles on key upcoming deals, affecting its market share and billions in fees. Still, the bank signaled it has a strong pipeline for M&A deals and equity capital markets.

The bank signaled that further measures to reduce risk could be on the way as part of the ongoing review of the business strategy.

Key highlights:

• Net income of 253m Swiss francs vs expectations for profit of 380 million francs
• Net revenue of 5.1b francs vs estimate of 5.36b
• International wealth management pretax profit 340 million francs vs 355.6 million estimate
• Investment bank pretax loss 86 million francs vs 163.8 million estimated loss