Credit Suisse Conference Call Notes (I) – Rating Agencies, Downgrades, Risks Priced, Higher Capital Ratios, CDS, Capital Guidance, Capital Ratios, CET1, Leverage Ratio, Static vs Dynamic Margining

The following quotes are all from the conference call that took place on the morning of July 29th, 2021. There are good reasons to believe that the stock has found a floor, bad news priced, based on the statements in the conf call.

CFO comments on rating agencies and potential downgrades

Replies to question from HSBC.

CFO: I think quite clearly the Archegos loss and the Greensill supply chain funds have caused reviews of our credit ratings by all the major agencies. And I think at least one of them actually has us on negative watch. And I think Moody's as you know, did downgrade certain of our instruments, earlier this month, although that was partly in the connection with the technical change relating to their treatment of certain AT1 instruments, in terms of their subordination, treatment as equity or debt between the different layers of the bank. That's going to be, obviously, an ongoing process and I imagine they will be reviewing these results and also the Archegos report just as you are. I think it's only appropriate, we do list that as as a risk factor. 
CFO: As a matter of practicality, I would say basically if you look at the moves in certain instruments such as CDS, they already basically priced in such a downgrade some months ago, and the rating agencies now have to make their own decisions about this whole thing. But I think it's appropriate we listed it as a risk factor just because it is a risk factor. But I think it's probably priced in already. And I guess we shall see and depend on, and see how they choose to react to this report.
CFO: Clearly the the capital ratios in particular are substantially higher than I think anybody was actually expecting on that. So is the key factor in terms of this. And you know, I think it is worth bottom line in terms of pre tax income, it on underlying basis it's about 11% lower than what was a very strong period a year ago. So you know, I think there are some reassurance factors there. But that's the decision ultimately that the rating agencies will need to make on their own.
CEO: And on the insurance on Greensill as you probably know, the insured party was not, were not the funds, but was the Greensill entity Greensill bank in principally, and we are together with Greensill Capital and there is a clear process where because the funds are only payees, loss payees, and this is a process that has to go through a certain protocol, which means that there is a certain delay until when we can even post the claims, and this is now starting to happen for some of the outstanding payments. And it's really now starting and we will update our investors, as we go on over the next few months, in terms of the insurance claims reactions by the insurance.

Audio source of quotes above (Minute: 14 onwards)

Capital Ratios – CET1 & Leverage Ratio

JP Morgan brought up this question: You clearly are running well above target level that you gave in the first quarter stage. And just wondering should we assume that the bank will increase capital ratios further considering there could be some hits coming your way, regulatory, write down, litigation, etc. Should we think about, 14, even 14 plus or should we think at this kind of level is the level you want to run rate until you have potential impacts coming against your capital.

CFO: Look, I think, you know, firstly, I think I did guide at the end of the first quarter that I wanted to increase the CET1 ratio to at least 13%. I did in excess of 13%. And I think we have taken a very sound approach to capital utilization as I've outlined already, both in terms of the reset the risk appetite and the bank wide risk review, and I think that's been right and appropriate, and and that has led to the CET1 ratio increasing to 13.7%. And and that does, by the way include the accrual for a dividend in respect 2021. Although the level of that will only be set by the board of directors as a recommendation to shareholders. At the beginning of next year, I just think that operating the bank above 13% I think is the prudent and the correct thing to do. I have to say, you know, I think the scale of the Archegos loss was a shocking disappointment and clearly also to our shareholders, and I think it's an appropriate response, and I would certainly expect to operate in excess of 13% for at least the balance of this particular year, basically. I think beyond that, I mean, and by the way, the leverage ratio is always as important as the CET1 ratio. So the fact we're operating at 4.2% and 6% against the Swiss minimum requirements is as important as the ratio, and I will just reiterate, I would expect to operate north of 4% for the leverage ratio for at least the balance of 2021. I think in terms about a longer term capital guidance, I think we will provide a proper update as part of the conclusion of the strategic review, once it's completed by the end of this year, but I don't think it's appropriate for me to actually add further at this moment.

Audio source of quotes above (Minute 6 onwards)

Static vs Dynamic Margining, Archegos, Internal Control System

Goldman Sachs brought this topic up.

Well as as we have tried to summarize also on our slide. So just to give you the example on dynamic and static margining, this was already discussed by the teams in September, October (2020). They had agreed that they would move some of the clients, including Archegos, from static to dynamic. It was re discussed in early March (2021). If you read the report, they were in the process of actually doing that and reaching out to the client, but it was just not prioritized the way it should have been. So this is to a large extent, really, a series of human errors and failures by the teams, they didn't effectively manage this situation. And whether it was lack of escalation or also limits, control of limits, which had numerous occasions being breached, but they did not act on it, even though they discussed it and we're supposed to do it. So this was clearly a series of failures, which is regrettable and which we have now been addressed with a new team both on the first line of defense in Prime Services, Prime Services Risk and on the risk management side.

Background on Static vs Dynamic Margining

Dynamic margining, unlike static margining, incorporates more real-time data such as market volatility and position concentration into margin calculations. When Credit Suisse scoped out how the new system would affect margins for Archegos, in February, it found Archegos would have to put up $4 billion extra on its positions—four times as much as it had at the time.

source: https://stockxpo.com/credit-suisse-archegos-report-what-you-need-to-know

Audio source of quotes used above

Using Python to transcribe Conf Calls, Webcasts

The above audio was uploaded to an S3 Amazon Bucket, then was fed via a Python script to Amazon Transcribe service which resulted in a raw transcript. That raw transcript was then used for the quotes above. By default Amazon Transcribe does not seperate speakers, has difficulty with abbreviations or names like “Archegos”, which will be transcribed incorrectly.

For more on transcription see this article: Link

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