Credit Suisse raises litigation provisions by $290m

Swiss banking giant Credit Suisse on Monday increased its mortgage-related litigation provisions by $290m just days after the US Justice Department fined Morgan Stanley over the sale of mortgage-backed securities in the run-up to the crisis.

The Swiss investment bank raised its provisions by CHF277m or $290m, which forced it to adjust fourth-quarter results to account for net income at CHF691m from an earlier report of CHF921m. Credit Suisse said there was no impact on core pre-tax income as the provisions were recognised in a non-strategic part of its investment banking unit.

“Developments that materially affect the bank's legal provisions must be considered and, if necessary, reflected in the 2014 results if they become known before the financial statements are finalised,” said Credit Suisse in a statement.

The move raises fears that the bank may be unable to maintain its capital buffer this year given the increasing cost burden from investigations into its role in the US sub-prime housing crisis. Credit Suisse shares were off 0.34% at CHF23.190 late afternoon in Europe.

The Swiss investment bank noted that "developments in industry-wide litigation and investigations in the United States relating to mortgages have resulted in an increase in provisions”. As such, the bank believes that possible losses relating to certain proceedings could now be up to CHF1.8bn, higher than earlier estimate of CHF1.3bn.

The news comes after US investment banking peer, Morgan Stanley agreed to settle an investigation into its creation and sale of residential mortgage-backed securities for $2.6bn on 25 February.

Fellow investment banks JPMorgan, Bank of America and Citigroup previously settled similar probes with federal and state authorities, agreeing to pay a total of more than $35bn in cash and consumer relief.

Goldman Sachs meanwhile disclosed that it received a letter from US authorities, saying it could face a civil lawsuit stemming from the sale of mortgage-backed securities before the financial crisis.

Huw Van Steenis, banking analyst at Morgan Stanley, said Credit Suisse started 2015 with the worst leverage ratio out of its peers and minimal capital generation due to the sharp rise in the Swiss franc.

“We increase our 2015 litigation forecast to CHF1.75bn from CHF1.25bn for mortgage and other related issues, based on Credit Suisse’s new estimate of CHF1.8bn possible losses, although we still recognise the large uncertainties on timing and final amount,” said Van Steenis.

Last year Credit Suisse pleaded guilty to helping US clients evade taxes, becoming the first large global bank to admit to criminal charges in two decades, resulting into $2.6bn of fines.