Total bank losses from Archegos implosion exceed $10bn

Bank losses from the implosion of Archegos Capital have surpassed $10bn, after Nomura reported a $2.9 billion (€2.4 billion) hit and suspended its head of prime brokerage, and UBS revealed a $861m loss from the debacle.

The collapse last month of the family office run by former hedge fund manager Bill Hwang is one of the most spectacular on Wall Street and has already resulted in losses of $5.4bn for Credit Suisse and $911m for Morgan Stanley.

Japanese megabanks MUFG and Mizuho are expected to report up to $390 million of losses, while Goldman Sachs and Wells Fargo – two other banks that counted Archegos as a client of their prime brokerage divisions that service hedge funds – escaped from the fallout relatively unscathed.

Leverage

The incident has led to recriminations at the eight banks known to have offered tens of billions of dollars of leverage to Archegos and prompted investigations about their risk controls from regulators in the US, UK and Switzerland. Executives at the banks have questioned whether Archegos was transparent enough in its dealings with the various counterparties, which ramped up their combined exposure.

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Nomura’s total hit of $2.9 billion from the implosion of Archegos, reported on Tuesday, was considerably greater than the approximately $2 billion loss that Japan’s biggest brokerage initially flagged when the debacle first came to light in late March, and drove the bank to its biggest quarterly loss since the 2008 global financial crisis.

Two people close to Nomura said that, as a direct result of the Archegos incident, the company had indefinitely suspended Dougal Brech, its UK-based global head of the prime brokerage, the division that had nurtured Hwang as a client. Brech formerly worked at Credit Suisse.

The Japanese bank said on Tuesday that it was not planning any big strategic changes to the wholesale banking unit under which its prime brokerage business sits. It has pledged to fortify its risk management systems.

Trades

Meanwhile, Swiss bank UBS said on Tuesday it had lost $774 million from trades linked to Hwang’s fund in the first three months of the year, and warned there would be a further $87m of Archegos-related losses in the second quarter, adding up to $861 million in total. This marred an otherwise robust set of first-quarter earnings, with the bank’s net profits rising 14 per cent from a year earlier to $1.8bn.

Nomura’s losses left a $2.3 billion dent in its profits for the financial year that closed on March 31st. But the process of unwinding the Archegos positions, which Nomura said was 97 per cent complete, has created an additional loss of $570m that analysts said would hurt its performance in the quarter that ends in June.

They have revived questions over whether the Japanese bank’s efforts to pursue overseas growth have prompted it to embrace more risk than it can handle, given the relatively small scale of its operations in the US.

Nomura said on Tuesday that it had appointed Christopher Willcox, the former head of JPMorgan Asset Management, as the co-chief executive of its US unit.

Concerns

With concerns swirling around whether other family offices have also been extended the scale of financing granted to Archegos, Nomura said in a presentation that accompanied the results that it had conducted a full review of existing prime brokerage transactions. “We?.?.?.?reviewed positions in other financing-related businesses confirming no other similar transactions,” the presentation said.

The net loss of ¥155.4bn (€1.1 billion) for the January to March quarter shattered Nomura’s hopes for what was on course to be a record year of profits, driven in large part by a strong performance of its historically volatile US business.

Without the Archegos collapse, said investors, Nomura’s rebound in 2020 would have been a dream start for Kentaro Okuda. Its former investment banking head started as chief executive a year ago and was the company’s first leader drawn from outside the core domestic brokerage business.

Instead, Okuda’s first full-year results announcements began with an apology and a pledge to improve risk management.

Profits

Nomura’s net profits for the full year that ended in March were $1.4 billion, down 29 per cent from fiscal 2019. Despite the hit to the wholesale business, full-year profits at Nomura’s retail and asset management segments grew 87 per cent and 158 per cent year on year, respectively.

Shunsaku Sato, a senior credit officer at rating agency Moody’s Japan, said those gains “highlighted the importance of profit contributions from the two segments in stabilising the company’s overall profitability”. – Copyright The Financial Times Limited 2021