April 21, 2021

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Rating agencies cut Nomura and Credit Suisse outlooks after Archegos debacle

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Credit rating agencies have downgraded their outlooks for Nomura and Credit Suisse, citing concerns over risk management as the banks confront multibillion dollar losses from the Archegos Capital Management debacle.

The move by Moody’s and Fitch on Wednesday comes amid intensifying scrutiny of Nomura’s international operations and its appetite for profitable but more risky trading activity.

Nomura and Credit Suisse were among banks that allowed Archegos, a New York-based family office run by former hedge fund manager Bill Hwang, to amass billions of dollars of exposure to equities through swap contracts. The trades imploded last week, leaving the banks scrambling to sell shares, including in US media group ViacomCBS.

As Nomura begins an internal investigation of the debacle, a graph prepared by an analyst at Nomura’s prime brokerage desk in Tokyo, and seen by the Financial Times, appears to show that the bank ramped up its financing of US securities by more than 500 per cent in the months leading up to the Archegos fire sale.

Prime brokers lend cash and securities to hedge funds and process their trades.

In its outlook downgrade on Wednesday, Moody’s pointed to the willingness of Japan’s biggest investment bank to take on large exposure to clients without sufficiently offsetting the risk. Nomura warned on Monday that it could face losses of about $2bn. 

“The magnitude of the potential loss also highlights the difficulties Nomura has in managing the risks of large complex transactions,” Moody’s noted, adding that the hit highlighted Nomura’s challenge in improving the profitability of its international business without engaging in high-risk activities.

Rival agency Fitch said that its decision to put its “viability rating” of Nomura on a negative watch reflected an assessment of the bank’s risk appetite and the potential for “further reputational and earnings decline”.

“Nomura’s profitability has been held back by structural challenges and recent events will probably raise further questions over the strategy of its international business,” Fitch analysts noted.

The agencies have not changed the ratings on either of the banks.

The graph showing the percentage increase in financing balances at Nomura’s prime brokerage services from April 2019, which was created for internal use, according to a person close to the bank, was leaked to a number of hedge funds in Hong Kong and London.

While it does not put any values on the various financing levels across Nomura’s international operations, it appears to show that the bank’s financing balances for long and short positions on US securities rapidly increased from June 2020, far outpacing growth in its other markets.

“Their US prime brokerage balances appeared to be exponentially growing out of proportion with any other region,” said one financial professional who had been sent the graph and questioned why it did not raise red flags at the bank.

A person close to Nomura said the graph did not show a “true picture” of its US securities financing. The bank declined to comment.

The revision to Nomura comes a day after Standard and Poor’s downgraded its outlook for Credit Suisse to negative after the bank warned of significant losses related to Archegos. The FT has reported the loss could be as high as $4bn, more than a year’s net profit for the Swiss lender. 

The debacle follows on from another risk and compliance failure in its relationship with Lex Greensill, with whom Credit Suisse had a $10bn supply chain finance fund partnership. Greensill’s collapse earlier this month could cost the bank’s clients $3bn, leaving it exposed to litigation. 

“Potential material loss from a single client exposure raises questions about the quality of the group’s risk management and risk appetite,” S&P said. 

“Management of its relationships with the US hedge fund and Greensill group also has potential to damage the bank’s reputation, which was already tarnished following high-profile governance issues in 2020 and culminated with its CEO’s departure”, the rating agency added, referring to Tidjane Thiam stepping down after a corporate espionage scandal.

Additional reporting by Laurence Fletcher

2021-03-31 09:29:22

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