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By Brenna Hughes Neghaiwi
ZURICH, July 29 (Reuters) - A "lackadaisical" attitude towards risk and "a lack of accountability" were to blame for Credit Suisse's $5.5 billion loss on investment fund Archegos, according to a review published on Thursday, as the bank reported a near-80% fall in second quarter profit.
Net profit of 253 million Swiss francs ($278.45 million) missed average forecasts for 334 million Swiss francs in the bank's own poll of 18 analysts.
"Credit Suisse delivered resilient underlying second quarter results and strong capital ratios as we are benefiting from having taken decisive actions to address the challenges raised by the Archegos and Supply Chain Finance Funds matters. We take these two events very seriously and we are determined to learn all the right lessons," Chief Executive Thomas Gottstein said in a statement.
Analysts had expected a nearly $600 million hole caused by more losses at stricken fund Archegos and further weakness in the bank's trading and advisory businesses to bring second-quarter net profit down to a quarter of its value a year ago.
Excluding Archegos and other significant items, Credit Suisse said pre-tax income would have dropped 11%.
Switzerland's second-biggest bank has been reeling from the twin shocks unleashed in March, when its prime brokerage business lost more than any other competitor from the collapse of Archegos, and as its asset management division scrambled to return some $10 billion of client investments linked to insolvent supply chain finance firm Greensill.
In a 165-page review unveiled on Thursday, law firm Paul Weiss, Rifkind, Wharton & Garrisson gave a damning assessment of the bank's risk management practices in its prime services unit and broader investment bank, though it did add there was no evidence of fraudulent or illegal activity.
"The Archegos matter directly calls into question the competence of the business and risk personnel who had all the information necessary to appreciate the magnitude and urgency of the Archegos risks, but failed at multiple junctures to take decisive and urgent action to address them," the report said.
Credit Suisse said in response to the report that it will use Archegos as "a turning point for its overall approach to risk management". It said action has been taken against 23 staff over Archegos, with nine fired and a total of $70 million in monetary penalties taken from all of them.
Under new Chairman Antonio Horta-Osorio, it is trying to turn the page after a swathe of investigations, executive changes, and divisional reshuffles, and is promising to open a new chapter with a strategic overhaul to be unveiled later this year.
An exodus of senior dealmakers and traders from its investment bank, and plans to reduce risk in its prime brokerage unit, have made the changes especially felt within that division.
A 41% fall in investment banking revenues showed the broader impact of the scandals to be slightly more pronounced than analysts anticipated, as its capital markets business posted a nearly 10% decline on an un-adjusted basis and its advisory revenues fell 37% "due to timing of deal closings". That combined with a $653 million Archegos hit pushed investment banking to a pre-tax loss.
On the trading side, adjusted revenues from equity sales and trading posted a 17% decline excluding Archegos. Fixed income sales and trading fell 33%.
Trading revenues also fell at major U.S. and European banks in the second quarter compared to 2020 when unprecedented market volatility during the early months of the coronavirus pandemic helped drive record volumes.
Credit Suisse has said it wants to pare back its prime brokerage unit, which conducts business with hedge funds and was responsible for the Archegos ties.
LEADING WEALTH MANAGER WITH A CULTURE PROBLEM
Investors and analysts have been waiting to see whether recent troubles at Credit Suisse, which have also left clients in its asset management business directly exposed to potential Greensill losses, have affected prized relationships with the ultra-wealthy.
Credit Suisse on Thursday reported 7.3 billion francs in net asset outflows from its wealth management businesses, an indicator of a gain or loss in business from rich clients, for the second quarter.
Chief Financial Officer David Mathers told journalists on a call that 4.2 billion francs of the outflows were related to its efforts to limit its risk in Asia, and the outflows had been concentrated early in the quarter. ($1 = 0.9086 Swiss francs) (Reporting by Brenna Hughes Neghaiwi, editing by Kirsti Knolle, Michael Shields and Kim Coghill)