Credit Suisse Hitting Every Pothole in the Road

With remarkable frequency Credit Suisse (CSGN) seems to hit the newspaper headlines for all the wrong reasons. Yesterday Credit Suisse issued a profit warning, stating there is a risk its exposure to a hedge fund could have a "highly significant and material" impact on its first-quarter 2021 results. The Financial Times reports the expected loss could be as much as $4 billion and the counterparty is a little-known family office, Archegos Capital. The announcement follows the Greensill exposure we addressed in our previous note on Credit Suisse. With limited information available currently we maintain our fair value estimate at CHF 15.50, but it seems likely we will need to cut this as more information becomes available. We highlight that we increased our risk rating to very high recently to compensate for our concerns over the risk management culture at Credit Suisse. This latest mis-step reinforces our view that Credit Suisse's problems are not only legacy issues but that there is a deeper institutional problem that needs to be addressed.

If the reports turn out correct and Credit Suisse needs to take a $4 billion hit, our estimate of Credit Suisse's preprovision profits for 2021 of CHF 5 billion should be enough to absorb the hit plus the CHF 890 million we have forecast in for loan-loss provisions. This however, does not include any material litigation costs from the Greensill matter. We estimate Credit Suisse sits on excess capital of around CHF 7 billion. Provided that the losses are contained to the speculative numbers, Credit Suisse's capital should therefore be sheltered but we do believe dividends and the targeted share buybacks for 2021 will be at risk.