Credit Suisse best bet is hardball over Greensill


Switzerland’s national flag flies above the logo of Swiss bank Credit Suisse at its headquarters in Zurich, Switzerland April 18, 2021. REUTERS/Arnd Wiegmann/File Photo

The customer is not always right. Credit Suisse (CSGN.S) Chief Executive Thomas Gottstein has a chance to prove as much in the fight over losses from funds linked to collapsed financier Greensill Capital. Clients are understandably aggrieved, but offering to share the pain would be counterproductive.

Credit Suisse Asset Management in March froze $10 billion of funds managed on behalf of outside investors, whose money it poured into trade-finance loans sourced by the now-insolvent Greensill. Borrowers like steel magnate Sanjeev Gupta’s GFG Alliance may be unable to pay, potentially leaving investors on the hook for $2.3 billion of losses.

The argument for compensation sounds persuasive. The funds’ investors include super-affluent families, companies, pension funds and clients of Credit Suisse’s Asia Pacific unit, the Financial Times reported. If Gottstein fails to cough up, they could easily pull business from other areas of the group like investment banking and the all-important wealth management division. One investor, former Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani, even ran the country’s sovereign wealth fund – Credit Suisse’s largest shareholder.

Gottstein’s best option is nonetheless to stiff even such powerful patrons. First, he simply can’t afford to hold the bag. Covering the full amount would send the bank’s common equity Tier 1 ratio down to 12.1% from 12.8%, according to Breakingviews estimates, reversing the benefit of a recent cash call and potentially forcing him to raise capital again. That would be embarrassing and painful, given a lowly valuation of 56% of tangible book value.

Partial reimbursement might be affordable. But it would also look a lot like admitting liability – dangerous as law firms prepare suits on behalf of angry investors. Gottstein’s shareholders and supervisor FINMA may also worry about the precedent: if compensating clients now represents a contingent liability for the bank, shouldn’t it have a higher capital ratio and lower valuation?

Finally, any lost earnings from irate clients would probably be more manageable than the pain of appeasing them. Using Credit Suisse’s 6 times 2022 earnings multiple, forecast 25% tax rate and 22% pre-tax profit margin, a $2.3 billion earnings hit would be equivalent to losing $2.4 billion of annual revenue – or 11% of the total analysts expect next year. It’s unlikely that the disgruntled clients are quite that important. Gottstein can let them fume.

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– Investors in Credit Suisse Asset Management funds linked to insolvent Greensill Capital are pushing the bank to compensate them for possible losses, the Financial Times reported on May 16.

– Swiss diagnostic group Quotient said in a regulatory filing that it had put $110 million into the supply-chain finance vehicles, which Credit Suisse froze in early March. It believes any losses should be “borne by Credit Suisse (and not by the company or other fund investors)”.

– Other fund investors include former Qatari Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani, who invested $200 million according to Bloomberg. Chinese developer Nam Tai Property put in $150 million, the Financial Times reported, while other investors include hundreds of Credit Suisse’s wealth management clients, pension funds and listed companies.

– The bank faces possible lawsuits organised by Boies Schiller Flexner and Quinn Emanuel on behalf of fund investors.

– Credit Suisse has said that some of the companies that the funds lent to may not pay back their debts when they fall due. Of about $10 billion in total assets across the different supply-chain finance vehicles, $2.3 billion is related to three borrowers: steel magnate Sanjeev Gupta’s GFG Alliance, coal miner Bluestone Resources and SoftBank Group-backed construction startup Katerra.

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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