Credit Suisse takes an additional $850 million provision

Darren Sinden

Royal Bank of Canada recently published a sector-wide note and flagged significant growth in investment banking fees at Credit Suisse, which Dealogic estimates suggest grew by 77% year over year.

Credit Suisse

Credit Suisse said it will post an unexpected 4th quarter loss thanks to an additional $850.0 million provision.

That money is being set aside in relation to a possible settlement of a court case that dates back to the global financial crisis and is relating to the sale of residential mortgage-backed securities, or RMBS.

The latest set back comes on top of the $450.0 million that the bank set aside in November against the winding down of York Capital Management, a hedge fund in which it had invested.

In November York Capital announced it would return money to clients, wind down its European operations and focus solely on managing internal money. Credit Suisse had been an investor in the fund since 2010 and took the hit to offset a related markdown in the value of its common equity tier one or CET1 capital ratio.

Today’s news is the latest development to frustrate attempts by the recently appointed CEO, Thomas Gottstein, to refocus the business by streamlining the structure at both the investment bank and the asset management division.

The bank’s guidance on Q4 investment banking revenue suggests it should grow by around 15% when measured in US dollar terms, and despite the increased provisions, Credit Suisse will press ahead with a $1.70 billion share buyback program.

Credit Suisse is one of a number of banks that are still defending claims related to the sale of mortgage-backed securities, which suffered sharp falls in value during the market turmoil seen in 2008. Peers Morgan Stanley, UBS and Nomura are also facing similar claims.

However, it’s not all bad news for the bank despite its shares trading almost 3% lower this morning, Credit Suisse believes it has strong grounds for appeal should any judgement in the case go against it.

Earlier this week JP Morgan upgraded the Swiss bank to overweight from neutral and raised its price target to CHF 14.00 from CHF 12.70. At the time of writing, Credit Suisse stock was trading at CHF 12.20.

Royal Bank of Canada published a sector note on global investment banks this week and was generally bullish of the sector prospects. RBC flagged significant growth in investment banking fees at Credit Suisse, which Dealogic estimates suggest grew by 77% year over year in 2020. However, despite assuming that larger provisions would be necessary at the Swiss lender, the Canadian bank kept its rating on the stock at sector perform.

We don’t have long to wait before we find out how US investment banks fared in the final three months of last year. Goldman Sachs and Bank of America will report Q4 2020 earnings on January 19th, whilst Morgan Stanley will publish results the following day.

We have already had seen how smaller rivals Jefferies Group LLC performed as they published their Q4 2020 results on Tuesday this week.

Their figures showed that net revenues were up by more than 115% in the 4th quarter, over the same period in 2019 and investment banking revenues had jumped by 133.0% on the same basis. Looking at the full financial year 2020 IB revenues were up 69.7% and sales and trading revenues by 69.7% when compared to 2019.

Shares in the parent company Jefferies Financial Group have rallied by 8.50% over the last week as a result.

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