Credit Suisse and Nomura warn of losses after fund’s default

Swiss bank says it is unwinding positions in relation to losses at Archegos Capital.

Credit Suisse said it was too early to quantify the exact loss it faced but said this could be ‘highly significant and material’ to its results for the first quarter. Picture: AFP

Global investment banks Credit Suisse Group AG and Nomura Holdings Inc. said they could incur substantial losses from dealings with a U.S. client, days after a multibillion-dollar fire sale of stocks from a large investment fund.

Shares in both banks tumbled after the statements, in which neither named its respective client. In recent days, losses at Archegos Capital Management, run by former Tiger Asia manager Bill Hwang, triggered the liquidation of positions approaching $US30 billion in value, The Wall Street Journal has reported.

Credit Suisse said it was too early to quantify the exact loss it faced but said this could be “highly significant and material” to its results for the first quarter, which ends this month. Its stock fell about 9% in early trading.

“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” the Zurich-based bank said Monday. “Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions.”

In a margin call, a bank asks a client to put up more collateral if a position partly funded with borrowed money has fallen sharply in value. If the client can’t do afford to do that, the lender will sell the securities to try to recoup what it is owed.

Large banks served as prime brokers to Archegos, meaning they processed the fund’s trades and lent it cash and securities. Late last week Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG swiftly unloaded large blocks of shares tied to Archegos, the Journal has reported.

Block trades late last week involving Archegos spanned media companies such as ViacomCBS Inc. and Discovery Inc., as well as a slew of Chinese technology stocks, including Baidu Inc., GSX Techedu Inc., IQIYI Inc., and Tencent Music Entertainment Group.

Also on Monday, Japan’s Nomura said an event on March 26 could “subject one of its U.S. subsidiaries to a significant loss arising from transactions with a U.S. client.” The bank said it was evaluating the extent of any loss and the impact on results.

Nomura estimated the claim against its client at $US2 billion, based on Friday’s market prices, and said that could change depending on market moves and how transactions were unwound. Nomura also postponed a planned sale of $US3.25 billion in dollar bonds.

Given the bank’s high capital buffers – it had a common-equity tier 1 ratio of more than 17% as of the end of December – there “will be no issues related to the operations or financial soundness of Nomura Holdings or its U.S. subsidiary,” it said.

Shares in Nomura fell 16.3% to 603 yen, the equivalent of $US5.50, suffering a record single-day loss, Refinitiv data showed. The drop cut Nomura’s market value by about $US3.3 billion to roughly $US16.8 billion, according to FactSet.

With limited growth opportunities at home, Nomura in 2008 tried to capitalise on the global financial crisis to expand overseas, buying Lehman Brothers’ investment-banking franchise in the Asia-Pacific region and Europe. However, it had to undertake rounds of restructuring and cost-cutting starting in 2011 and 2016.

Like other banks, Nomura has recently benefited from booming global markets. Income from its international business more than doubled in the nine months through September, and made up 42% of group pretax income. Overall pretax income totalled 396.8 billion yen for that period, the equivalent of $US3.6 billion.

The Wall Street Journal