Credit rating agencies have downgraded their outlook for Nomura and Credit Suisse, citing risk management concerns as banks face multibillion-dollar losses following the Archegos Capital Management debacle .
The move by Moody’s and Fitch on Wednesday comes amid scrutiny of Nomura’s international operations and appetite for a profitable but riskier business venture.
Nomura and Credit Suisse were among the banks that enabled Archegos, a New York-based family office run by former hedge fund manager Bill Hwang, to amass billions of dollars in equity exposure through contracts swap. Dealings imploded last week, leaving banks scrambling to sell shares, including in US media group ViacomCBS.
As Nomura begins an internal investigation into the debacle, a chart prepared by an analyst at Nomura’s main brokerage office in Tokyo and seen by the Financial Times appears to show that the bank has increased its funding of US securities by more than 500% in the months leading up to the Archegos clearance sale.
Prime brokers lend money and securities to hedge funds and process their transactions.
In its downgrading of the outlook on Wednesday, Moody’s pointed to Japan’s largest investment bank’s willingness to take on large exposure to clients without sufficiently offsetting the risk. Nomura warned on Monday that it could face losses of around $2 billion.
“The magnitude of the potential loss also highlights the challenges Nomura faces in managing the risks of large, complex transactions,” Moody’s noted, adding that the success highlights Nomura’s challenge to improve the profitability of its business. international organizations without engaging in high-risk activities.
Rival agency Fitch said its decision to place Nomura’s “viability rating” on negative watch reflected an assessment of the bank’s risk appetite and the potential for “further decline in reputation and earnings.” “.
“Nomura’s profitability has been hampered by structural challenges and recent events will likely raise new questions about its international business strategy,” Fitch analysts noted.
The agencies did not change the ratings of any of the banks.
The graph showing the percentage increase in Nomura prime brokerage funding balances from April 2019, which was created for internal use, according to a person familiar with the bank, was leaked to a number hedge funds in Hong Kong and London.
While it places no value on the varying levels of funding for Nomura’s international operations, it appears to show that the bank’s funding balances for long and short positions in US securities grew rapidly from June 2020, far outpacing the growth of its other markets.
“Their prime brokerage balances in the US seemed to be growing exponentially and disproportionately to any other region,” said a finance professional who received the chart and wondered why he hadn’t. raised alarm signals at the bank.
A person close to Nomura said the chart did not show a “true picture” of its US equity funding. The bank declined to comment.
Nomura’s revision comes a day after Standard and Poor’s downgraded its outlook for Credit Suisse to negative after the bank warned of large losses related to Archegos. The FT reported that the loss could reach $4 billion, more than a year of net profit for the Swiss lender.
The debacle follows another risk and compliance lapse in its relationship with Lex Greensill, with whom Credit Suisse had a $10 billion supply chain finance fund partnership. Greensill’s collapse earlier this month could cost the bank’s customers $3 billion, exposing it to litigation.
“The potential material loss of exposure to a single client raises questions about the quality of the group’s risk management and risk appetite,” S&P said.
“Managing its relationship with the US hedge fund and the Greensill Group also has the potential to damage the bank’s reputation, which was already tarnished following high-profile governance issues in 2020 and culminating in the departure of its CEO,” added the rating agency, referring to Tidjane. Thiam resigns after an industrial espionage scandal.
Additional reporting by Laurence Fletcher