Credit Suisse to post 4Q loss tied to U.S. legal woes

Credit Suisse Group AG expects to post a fourth-quarter loss after setting aside $850 million for legal cases in the U.S. as chief executive officer Thomas Gottstein seeks to tackle legacy issues and start the year with a clean slate.

The amount is more than twice what the bank signaled last month when it flagged that a dispute with bond insurer MBIA could cost it more than expected, though it covers a number of related cases that it has since reviewed. The provision comes on top of a previously announced $450 million impairment on a hedge fund investment that will also be booked in the fourth quarter.

The loss caps a year of setbacks for Gottstein, who took over in the wake of a spying scandal in February. While he simplified the organizational setup, including at the investment bank, and started a review of the asset management business, Gottstein has been unable to stop a constant flow of bad news. Last month, the bank warned it risks missing a key profit target because of the impact of the pandemic.

“The drip-feed of negative news in the past two months has been unhelpful, but one would hope that Credit Suisse is now closer to drawing a line under this,” analysts at Citigroup, led by Andrew Coombs, wrote in a report.

Switzerland’s second-largest bank had previously set aside $300 million in connection with the U.S. case. It is among lenders including Morgan Stanley, UBS Group AG and Nomura Holdings that are still defending themselves against claims on the sale of the securities that plummeted in value during the 2008 financial crisis. Credit Suisse probably has the most exposure as it faces suits seeking more than $3 billion, according to Bloomberg Intelligence.

The two charges — for the legal cases and the bank’s investment in hedge fund York Capital — mar a quarter in which most rivals were lifted again by a global trading rally. Deutsche Bank AG has said market gains that bolstered revenue during 2020 continued into the fourth quarter and will help boost growth through 2022, while UBS has also benefited from elevated client activity.

Credit Suisse said its investment banking revenue in the fourth quarter is up more than 15% in dollar terms from a year earlier, compared with guidance given last month for an increase in the mid-teens. It reiterated a plan to buy back as much as 1.5 billion francs ($1.7 billion) in shares this year.

Still, with roughly $1.3 billion in one-off hits now flagged for the fourth quarter, Credit Suisse is set to end the year trailing peers again, with Vontobel analyst Andreas Venditti estimating a net loss of 300 million francs for the final three months of 2020. The bank trailed peers in key businesses in the third quarter, and suffered a series of setbacks in the first half, from loan losses to questionable dealings for a large client.

Credit Suisse said on Friday it still believes it has strong grounds for appeal in the U.S. legal cases. MBIA is seeking $740 million in damages for an alleged breach of contract. The bond insurer claims Credit Suisse didn’t make good on promises to repurchase residential mortgage backed securities transactions sold by the bank and insured by MBIA in 2007. Over the last 10 years, MBIA also brought claims of material misrepresentations, fraudulent inducement and breach of contract.

Credit Suisse had previously resolved one of its largest cases related to mortgage-backed securities with the state of New York, paying an undisclosed settlement well below the $11.2 billion sought in damages, according to press reports at the time. In 2017, the bank agreed to pay $5.3 billion to settle a U.S. investigation into the bank’s sales of toxic mortgage debt before the financial crisis. Credit Suisse later said the total settlement cost had fallen to $2.6 billion.

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