How big a threat is Credit Suisse to India and the world?

Just a week ago, 14 years after the bankruptcy of Lehman Brothers triggered a global financial crisis, the liquidation of its brokerage unit ended. More than $115 billion was paid out to Lehman’s 1.1 lakh customers, secured and unsecured creditors, and a trustee who oversaw the brokerage’s liquidation and his law firm.

Lehman Brothers had been US’s fourth-largest investment bank before filing the largest bankruptcy in American history by far on September 15, 2008, leaving over $600 billion in debt.
 

Today, on the other side of the Atlantic, growing concerns over the financial health of Switzerland’s second-biggest lender Credit Suisse have sparked fears on whether the world should brace for another Lehman-like financial fallout. Its bigger Swiss peer UBS Group had received a state bailout in the 2008 crisis.

Credit Suisse has been assuring staff, counterparties, clients and investors that its liquidity and capital position are strong. But its shares have fallen 55% over the past year, giving it a market cap of about $11 billion. This is lower than several Indian banks like HDFC Bank, Axis Bank, SBI, ICICI Bank, IndusInd Bank.

One of the biggest banks in Europe, Credit Suisse had $1.6 trillion in assets under management at the end of 2021. It has wealth management, investment banking and asset management operations, besides a domestic Swiss bank.

Swiss central bank has designated it one of the country’s global systemically important banks, whose failure would cause “significant harm to the Swiss economy and financial system”.

The bank’s credit default swaps (CDS), an instrument that measures the cost to insure its bonds, hit their highest levels since 2009. CEO Ulrich Koerner, who took charge in August, is attempting to restore the bank’s profitability.

Over the past three quarters alone, Credit Suisse’s losses have hit nearly $4 billion, while ratings downgrades increased its financing costs.

The collapse of US family office Archegos Capital Management cost the bank $5.5 billion last year. It suffered further losses from lending to the now-defunct supply-chain finance company Greensill Capital.

Multiple changes in top leadership since 2020 and high-profile risk management failures have also attracted investor scrutiny. The bank is due to present a transformation plan when it releases third-quarter results on October 27.

Credit Suisse had total assets of $735 billion at the end of June. The strategic review launched by the new CEO will focus on strengthening the bank’s flagship wealth management business and scaling back investment banking into a “capital- light, advisory-led” business. Asset and business sales are also on the cards.

It is also evaluating strategic options for its securitised products group, a trading business. Analysts estimate it could face a capital shortfall of as much as $6 billion.

Amit Jain, Co-Founder, Ashika Global Family Office Services says, at this stage, only govt can support Credit Suisse. . European economy may face a shock, he believes. Indian markets may see a temporary correction. 

Given the negative news flow, Citigroup analysts see significant execution risk in any new strategic plan. In the short term, they said widening credit spreads can exacerbate market fears and damage counterparty confidence as well as drive funding costs higher.

And in the long term, the fall in its share price will further dilute its capital raising capability. And it will throw a spanner in plan for any investment banking restructuring that Credit Suisse can undertake.

Santosh Joseph, Founder and Managing Partner, Germinate Investor Services LLP says, finance costs have gone up, Eurozone is struggling. Credit Suisse’s story isn’t a surprise, stakeholders can act. If India gets impacted, it’ll be the first to bounce back, he says. 

Jose Antonio Alvarez, the CEO of Santander, one of Euro zone’s biggest banks, said that liquidity in the banking sector was “extraordinarily high” and therefore did not see contagion risks in the sector.

Even in the worst scenario, any spillover from a potential Credit Suisse blowout will only have a transient impact on India’s financial markets whereas any contagion to Indian banking systems is unlikely. Credit Suisse’s Indian branch has a balance sheet size of just 20,732 crore as of FY22 end.

But investors will be closely watching any action from the Swiss government and whether or not Credit Suisse will be able to execute its soon-to-be-released restructuring plan.