Credit Suisse, Nomura and others envision up to $ 10 billion in losses from Archegos saga, according to JP Morgan

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JP Morgan said the brokerage industry runs a business at mark-to-market and holds liquid collateral. (Image: REUTERS)

According to JP Morgan, the world’s major investment banks, Credit Suisse, Nomura and others, victims of the fallout from Archegos, could suffer losses amounting to $ 10 billion. In a recent note, analysts at JP Morgan said that the losses incurred by banks could be very significant for a company marked-to-market and holding liquid collateral. “We now expect losses well beyond the normal business case scenario for the industry,” they added. Earlier last month, the main Wall Street investment banks were forced to liquidate positions taken by Archegos Capital, after failing to meet margin requirements, resulting in significant losses for the banks concerned.

JP Morgan said the brokerage industry runs a business at market value and holds liquid collateral. “This tells Nomura that he could lose $ 2 billion and that the press speculates losses of $ 3-4 billion at CSG (Credit Suisse) as an unlikely outcome,” the note said. “We are still puzzled as to why CSG and Nomura have been unable to unwind all of their positions at this point – as we would expect to receive an announcement as soon as this is the case, on the scale of potential losses,” said added analysts.

Under normal circumstances, JP Morgan said, the industry’s losses would have been capped at $ 2.5 billion to $ 5 billion. However, Archegos Capital ran a highly leveraged business. “Archegos was heavily mined at 5-8x [ie about $50-80 billion exposure for about $10 billion equity] and the use of equity swaps has increased the inability of PBs to see the risk of concentration in holdings within the hedge fund in question, in our view, ”said JP Morgan.

Buyouts take a hit

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Nomura, the other big player to be hit by Archegos, had planned a share buyback. “In the case of Nomura, our analyst Wataru Otskua reduced the share buyback for FY2020 from JPY 75 billion to JPY 10 billion,” the note said. In addition, he expects Credit Suisse not only to cancel its share buyback plans for 2021, but to preserve the dividend. JP Morgan analysts do not assume any buybacks for the next two years given the impending implementation of Basel 4 by January 2023.

Riddle of Archegos

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What led to this heavy unfolding was a sharp drop in the shares held by Archegos Capital. Stocks fell 39% on average. This forced Archegos to sell stakes in companies such as GSX Techedu, ViacomCBS, Discovery, iQIYI, Tencent Music, Vipshop, Baidu and Farfetch. As the company failed to cover losses and therefore could not meet the margin requirements, banks were forced to unwind positions through block trades, resulting in a further decline in stock prices. .

“Based on the latest publicly available information, the banks most exposed to the companies mentioned 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 held a 10% stake in the company in February, while Credit Suisse held 6%. Morgan Stanley’s exposure was widespread with over 5% stakes in all companies except Baidu. Morgan Stanley had a stake of more than 10% in GSX Techedu and iQIYI. Credit Suisse was exposed to all companies except Farfetch. Goldman Sachs’ exposure was primarily focused on GSX.

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