Credit Suisse Has Key Credit Rating Cut Over Twin Scandals

(Bloomberg) -- Credit Suisse Group AG had a key credit rating cut following the twin hits from Archegos Capital Management and Greensill Capital, adding to headwinds for Chairman Antonio Horta-Osorio as he seeks to turn around the lender.

In the first major downgrade since the bank’s recent troubles started in March, Moody’s Investors Service on Tuesday lowered the long-term senior unsecured debt and deposit ratings of Credit Suisse AG, which houses the lender’s main investment banking and wealth management businesses, by one notch to A1 from Aa3. Moody’s affirmed the ratings of Credit Suisse Group.

Even before the decision, which was prompted in part by a change in methodology at the ratings company, Credit Suisse had seen its funding costs rise, adding to challenges as the bank grapples with defections of key executives, legal risks and a financial toll that’s risen to more than $5 billion. Horta-Osorio has pledged a thorough review and said the scandals, which forced the bank to tap investors for fresh capital, went beyond any he’d lived through over three-and-a-half decades working at banks.

The downgrade reflects a higher-than-anticipated risk appetite and deficiencies in risk management and controls, Moody’s wrote in a statement. The bank’s financial position may be further strained by additional losses from those two events, it said. All three major credit rating companies had lowered their outlook on Credit Suisse in the wake of the scandals.

Read more: Credit Suisse Crisis Overhang Sends Bond Funding Costs Higher

Credit Suisse, which has exited about 97% of its exposure to Archegos, expects a related 600 million-franc ($654 million) loss in the second quarter, taking the total hit from the collapse to about $5.5 billion. In response, it’s cutting risk in the prime business catering to hedge fund clients, while strengthening capital with the sale of notes converting into shares.

To boost its defenses, the Swiss lender has named Amelie Perrier to a new role in risk management. Perrier, who previously covered equity derivatives market risk globally, was appointed head of counterparty market risk, according to an internal memo from late June obtained by Bloomberg.

“Although Moody’s anticipates that Credit Suisse will enhance its governance and risk management practices, including implementing the recommendations resulting from internal and external investigations, the extent and effectiveness of these measures will remain uncertain for some time,” Moody’s wrote.

The ratings company also cited a change in its methodology for assessing bank risk as a reason for the downgrade. As a result, Moody’s said it now believes that Credit Suisse AG has a weaker capacity to absorb unexpected losses.

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