Caixin
Apr 24, 2020 02:49 AM
FINANCE

Update: Luckin Share Collapse Adds to Credit Suisse’s Asian Loan Losses

A Luckin Coffee Inc. branded cup. Photo: Bloomberg
A Luckin Coffee Inc. branded cup. Photo: Bloomberg

(Bloomberg) — Credit Suisse Group AG was stung by the collapse of China’s Luckin Coffee Inc. stock following an accounting scandal, leading to a five-fold increase in Asian loan-loss provisions.

The Swiss bank set aside 97 million Swiss francs ($100 million) for soured loans, primarily related to three cases, the largest of which was Luckin Coffee, according to a person familiar with the matter. The bank referred only to a “Chinese food and beverage company” in its earnings statement Thursday.

Credit Suisse led the initial public offering for Luckin in New York last year and is among the biggest creditors on defaulted loans to Luckin founder Lu Zhengyao. The bank provided about $100 million in margin loans before accounting fraud allegations at the Chinese company triggered a collapse in the stock this month.

Luckin, the biggest challenger to Starbucks Corp. in China, has said its chief operating officer and some of its employees may have fabricated about $310 million in sales.

Credit Suisse Chief Executive Officer Thomas Gottstein declined to comment on Luckin Thursday in a Bloomberg Television interview.

“This episode is unfortunate that it happened, but we’re still at the beginning of various investigations” involving auditors and lawyers, he said. “Too many parties involved to make an early conclusion.”

Morgan Stanley, Credit Suisse and Haitong International Securities Group were among the biggest participants in $518 million of margin loans to Lu that are now in default. Haitong put up $140 million, while Morgan Stanley and Credit Suisse lent about $100 million each. Goldman Sachs Group Inc. and China International Capital Corp. had smaller exposures.

Trading in Luckin remains halted on the Nasdaq pending the accounting review. The shares last traded at $4.39 on April 6, down 91% from the January high and well below the $17 IPO price in July.

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Even with the provisions and credit losses, Credit Suisse pretax earnings in the region jumped 38% to 252 million francs, driven by “significantly higher” revenue in the markets businesses and in private banking. Revenue from markets soared 55% to 448 million francs, while the bank added 3 billion francs in new private banking assets, even as the coronavirus rattled markets.

Credit Suisse recorded 160 million francs of unrealized mark-to-market losses in Asia to reflect fair value in its lending portfolio as credit spreads widened, causing its advisory, underwriting and financing revenue to tumble 78% to 36 million francs.

The loan-related losses are just part of the collateral damage coming from Lu’s business empire, which in addition to Luckin also includes two car services companies, one engaged in rental cars and the other in limousine services. Shortly after the Luckin scandal emerged, Moody’s Investors Service downgraded its corporate family rating and senior unsecured rating for Car Inc., Lu’s car rental company.

In another sign of potential financial distress, Lu’s limousine services company, Ucar, sold down its stake in Car Inc. last week and announced plans to potentially sell down more. If it follows through on those plans, the sales could raise up to $145 million.

The Luckin scandal was also a likely factor behind the U.S. securities regulator’s publication of an article this week warning investors on the risks of investing in emerging-market companies traded in New York. The article, whose authors included Securities and Exchange Commission Chairman Jay Clayton, mentioned China 22 times, and included a section on the agency’s “inability to inspect audit work papers in China.”

Such companies pose a number of risks, most of which center on the quality of their financial reports and limits on shareholders’ ability to take legal action when fraud or other illegal activity occurs, the article said.

Yang Ge contributed to this report

Contact editor Yang Ge (geyang@caixin.com)

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