Leading global investment banks Credit Suisse, Nomura and others caught up in the Archegos fallout could face losses adding up to $10 billion, according to JP Morgan. In a recent note, analysts at JP Morgan said that the losses faced by the banks could be very material for a business that is mark-to-market and holds liquid collateral. “We now expect losses well beyond normal unwinding scenario for the industry,” they added. Earlier last month, major investment banks on Wall Street were forced to unwind positions taken by Archegos Capital, after it failed to meet margin requirements, resulting in significant losses to the related banks.
JP Morgan said that the broking industry runs a mark-to-market business and holds liquid collateral. “It makes Nomura indication of potentially losing $2 billion and press speculation of CSG (Credit Suisse) $3-4 billion losses as not an unlikely outcome,” the note said. “We are still puzzled why CSG and Nomura have been unable to unwind all their positions at this point — as we would expect to get an announcement as soon as this is the case, on the scale of potential losses,” analysts added.
In normal circumstances, JP Morgan said, the industry losses would have been capped at $2.5-5 billion. However, Archegos Capital was running a highly leveraged business. “Archegos was highly leveraged at 5-8x [ie about $50-80 billion exposure for about $10 billion equity] and the use of equity-swaps increased the inability of PBs to see the concentration risk in holdings within the hedge fund in question, in our view,” JP Morgan said.
Buybacks take a hit
Nomura, the other big player to take a hit from Archegos, had planned a share buyback. “In the case of Nomura, our analyst Wataru Otskua has reduced the share buyback for FY2020 from JPY 75 billion to JPY 10 billion,” the note said. Further, it expects Credit Suisse to not just cancel its share buyback plans for 2021, but preserve the dividend. JP Morgan analysts assume no buyback for the next two years considering the impending Basel 4 implementation by January 2023.
Archegos conundrum
What led to the heavy unwinding was a sudden slump in shares held by Archegos Capital. Shares fell 39% on average. This forced Archegos to sell holdings in companies such as GSX Techedu, ViacomCBS, Discovery, iQIYI, Tencent Music, Vipshop, Baidu, and Farfetch. As the firm failed to cover losses and hence could not meet margin requirements, the banks were forced to unwind positions via block trades resulting in further fall in stock prices.
“Based on the latest publicly available disclosure the banks with the largest exposure to the mentioned companies were Morgan Stanley, Credit Suisse, Goldman Sachs, Nomura and to a lesser extent UBS and DB,” the report said.
Goldman Sachs held a 21.9% stake in GSX Techedu at the end of January this year. Morgan Stanley had a 10% stake in the company as of February, while Credit Suisse owned 6%. Morgan Stanley exposure was broad-based with 5%+ holdings in all companies except Baidu. Morgan Stanley had a 10%+ stake in both GSX Techedu and iQIYI. Credit Suisse had exposure to all companies except Farfetch. Goldman Sachs exposure was mainly concentrated in GSX.
