Morgan Stanley's headquarters in New York
Mario Tama/Getty ImagesHeightened trading activity was a savior for banks last year, but the recent fallout from Archegos Capital Management’s margin call last week will muddy the picture when the largest banks report first-quarter results next month.
Analysts at J.P. Morgan Securities said in a note Tuesday that they expected that banks collectively would face trading losses in the range of $5 billion to $10 billion, as result of Archegos being “highly leveraged” at an estimated five to eight times holdings.
Analysts had previously thought industry losses would come in between $2.5 billion and $5 billion.
The projected trading losses come a year after large banks — suffering from the sudden economic impact of the coronavirus pandemic — were helped by a surge in trading activity. Yet the trading spurred by a need to quickly unwind levered positions hurt the banks. More than $30 billion of stock in companies such as ViacomCBS (ticker: VIAC), Discovery (DISCA), and GSX Techedu (GSX) was sold over the last few days even though Archegos is thought to have only $10 billion in assets.
Among the banks known to have exposure to Archegos are Goldman Sachs Group (ticker: GS), Morgan Stanley (MS), UBS (UBS), Wells Fargo (WFC), Credit Suisse (CS), and Nomura Holdings (NMR). The latter two banks together are thought to account for more than half of the projected losses because it took them longer than peers to unwind the positions.
“We are still puzzled why Credit Suisse and Nomura have been unable to unwind all their positions at this point,” Kian Abouhossein, analyst at J.P. Morgan, wrote.
Nomura estimated losses of roughly $2 billion in a statement Monday while emphasizing the “financial soundness” of the bank. Credit Suisse on Monday said the losses would be “highly significant and material” to earnings, but it has not yet provided an estimate. Reports suggest the bank’s losses could be as high as $4 billion.
If true, J.P. Morgan analysts believe that Credit Suisse will have to halt its share repurchase plan for 2021. Credit Suisse did not immediately respond to requests for comment.
While losses at other banks are thought to be less severe, the fallout could raise questions about the risks that banks’ prime brokerage operations take.
Of the banks involved, Goldman Sachs and Morgan Stanley are thought to have fared better than most, given that they were able to sell positions earlier. Goldman Sachs has said that the financial impact to the bank will likely be “immaterial” while Morgan Stanley has not commented on the matter.
“We believe potential losses at GS / MS will likely be closer to hundreds of millions (vs. billions) in a quarter when most banks will likely surprise positively on trading and should be able to absorb much of the impact,” Steven Chubak, managing director at Wolfe Research, wrote Tuesday.
Wells Fargo said Tuesday that while it had a prime brokerage relationship with Archegos, it was no longer exposed to the fund and it did not suffer any losses when closing out its positions.
While the San Francisco-based bank may not have suffered financial losses, analysts at J.P. Morgan — in a separate note Tuesday — wondered if Wells Fargo would face reputational risk or increased regulatory scrutiny from the Archegos “debacle.”
Wells Fargo has been working to repair itself after its fake accounts scandal, which emerged in 2016. The bank currently operates under a $2 trillion asset cap imposed by the Federal Reserve, which has limited the bank’s ability to grow. Any new problems could delay the asset cap being lifted, analysts said.
As for the broader banking industry, which is recovering from the pandemic, the Archegos situation is a bruise banks that don’t need.
“Whenever any banks slip up significantly on risk management, it is negative for the industry,” Vivek Juneja, analyst at J.P. Morgan, wrote on Tuesday.
Write to carleton.english@barrons.com
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Banks May Take a $10 Billion Hit on Archegos, J.P. Morgan Says - Barron's
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