Credit Suisse Admits To Poor Risk Assessment Processes in Annual Report

Credit Suisse finds "material weaknesses" in its financial reporting controls, adding to the bank's challenges in its efforts to recover.

Credit Suisse admitted to inadequate risk assessment processes in its annual report on Tuesday (14 March), resulting in the failure to identify and analyse financial statement misstatements.

Bank's FY-2022 performance was not impacted despite biggest annual loss since financial crisis revealed.

Credit Suisse postponed their annual report publication by a week after receiving a last-minute call from the US Securities and Exchange Commission (SEC) about cash flow statements from the last three years, which were described as "technical".

Ulrich Körner, chief executive officer, said the SEC feedback was part of a "longer dialogue" during the Morgan Stanley European Financials conference.

"We're taking strong action to address the issue," he asserted, as expected from us.

The bank's recent findings arrive at a challenging time, having experienced several crises in recent years, leading to significant losses.

Following this, the bank's share price fell 4 per cent during early trading on Tuesday (14 March), currently standing at SFR 2.166. This year alone, the bank's share price has reduced by more than 20 per cent, with a decline of over 80 per cent over the past two years.

Credit Suisse's five-year credit default swaps had a record spread of 522 basis points (bps) on Tuesday (14 March); spiked at 350 bps in October.

Credit Suisse CDS spreads increased due to investor bearishness earlier in the week, resulting from concerns about the impact of Silicon Valley Bank (SVB)'s collapse on European companies.

Korner stated that Credit Suisse's credit exposure to SVB was insignificant on Tuesday (14 March).

Last week, the SEC asked the bank to ensure the weaknesses did not impact financial results, according to a source.

A query discovered cash flow restatements from 2019 due to netting treatment of some securities lending and borrowing, which caused the understatement of balance sheet and cash flow positions.

PwC stated that inadequate controls over non-cash items in the cash flow statements resulted in incomplete and inaccurate data.

Credit Suisse is working on a plan to fix weaknesses by boosting risk and control frameworks. The management team aims to improve controls by devising a remediation plan.

"We'll ensure proper classification of non-cash items in the consolidated statement of cash flows through robust controls," the statement said.

Credit Suisse appointed Dixit Joshi as its chief financial officer, replacing David Mathers, and changed all but one member of its executive board in the last two years.

Credit Suisse has announced its weak controls and its chair's decision to waive his $1.6 million annual fee due to the group's poor financial performance in 2022.

However, Axel Lehmann kept his $3 million board fee. Within a year of becoming chair, the group's shares dropped drastically by 75 per cent.

Finma, the Swiss regulator, closed its investigation into Lehmann's comments about customer outflows last week, finding no grounds for supervisory proceedings.

As part of its restructuring plan, the bank has announced that senior managers will receive equity in its investment banking arm, CS First Boston.

The bank aims to return to profitability and plans to spin off this arm; up to 20 per cent of its shares will be available to staff, vesting over a three year period following an initial public offering.