"Credit Suisse’s expected losses are expected to be largely due to its investment banking arm. This will have seen write-downs on its leveraged loan commitments, due to it not being able to redistribute leveraged loans at par value,” said Nick Hill, credit analyst at Standard & Poor’s in London.
Other financial institutions’ profits for the third quarter have suffered; Bear Stearns, Lehman Brothers and Morgan Stanley have all seen a fall in profits for the third quarter this year. However, Goldman Sachs reported record profits. Citigroup estimates it will report a decline in net income of around 60% from the same quarter last year.
"Our expected third-quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments and increases in consumer credit costs," said Charles Prince, chairman and chief executive officer of Citi.
Citi expects losses of approximately $1.3 billion pre-tax, net of hedges, on the value of sub-prime mortgage-backed securities warehoused for future collateralised debt obligation (CDO) securitisations, CDO positions and leveraged loans warehoused for future collateralised loan obligation securitisations. Citi is scheduled to release its third-quarter results on October 15.
“Among the reasons Citi has struggled this quarter is that it has low levels of reserves for consumer lending compared to the industry. This means it has less coverage against losses when people do not pay back their loans,” said Hill at Standard & Poor’s.
A number of other banks are yet to announce their third-quarter results, but analysts expect them to have struggled over this period. “I expect most banks to be down for their third-quarter profits. How much the banks will be impacted will depend on how diversified their banking business is,” added Hill.
The week on Risk.net, December 2–8, 2016Receive this by email