Is Credit Suisse crisis a threat for Indian banking, stock market?  

 

Credit Suisse Group AG, which is ranked as the world's 45th largest bank in terms of assets, is in trouble and there's a growing fear that if the bank collapses it could trigger the next global financial crisis. The situation is increasingly getting compared to the Lehman Brothers situation which triggered the global financial crisis of 2008. For perspective, the Switzerland-headquartered bank is just eight places above India's largest bank - the State Bank of India (SBI). Credit Suisse has assets worth $829.12 billion as against SBI's $694 billion, as per S&P Global rankings of the world's top 100 banks.

What is the problem with Credit Suisse?

The bank is running in losses. The bank's financials turned red in 2021 with a loss of $1.80 billion. That's a decline of 163 per cent from 2020. The bank's revenues were $29.04 billion in 2021 as against $32 .38 billion in 2020. Unfortunately, there has been no let-up in losses in the first two quarters of 2022 as pressure on financials has continued. The 166-year-old bank has attributed the disappointing performance to the lacklustre show of the investment banking division and a rise in litigation provisioning. "The bank's performance was significantly impacted by a number of external factors, including geopolitical, macroeconomic, and market headwinds," said Thomas Gottstein, CEO of Credit Suisse, who resigned in July after announcing the results.

What is Credit Suisse doing to come out of the crisis?

The bank is already working towards repairing the damage by strengthening its wealth management business and transforming its investment banking division. So far, there is no real danger from the capital side, which is a critical element in a lending business. The bank maintains a comfortable capital base with a core equity capital ratio of 13.5 per cent in June 2022. The core equity capital is calculated against the risk-weighted assets or loans of a bank. A core equity capital ratio of over 8 per cent is considered good in the market. The new CEO Ulrich Koerner is working on a turnaround plan which will be spelled out in October last week. Koerner is likely to make big changes in wealth and investment banking divisions with a plan to cut costs at all levels. But the stock market is reflecting the trouble at the bank. In the last five years, the bank's stock, which touched a high of 18.61 CHF (Swiss franc), has crashed to a low of 3.94 CHF. The bank's listed bonds and credit default swaps are also very unfavourable, raising red signals for the investors' community. 

Is Credit Suisse now a risk like the Lehman Brothers?

If the bank collapses, the immediate impact will be on the global financial market. But we aren't there yet and the hope is the bank will be back in green. But there are other prevailing threats too. More than the Credit Suisse situation, the global central banks' monetary tightening is a bigger worry. The first two events - Covid and the Russia-Ukraine conflict - have already created a lot of risk for banks in the form of rising interest rates for borrowers, currency depreciation, and a slowdown in the economy, which could result in defaults by borrowers. In such a scenario, if Credit Suisse collapses there could be more trouble. 

Should India be concerned?

Yes, a global financial crisis is always a concern but because Credit Suisse's India operations are limited, the threat to the Indian banking system is not grave. Credit Suisse AG has an Indian entity. It entered India in 1997 when the East Asian currency crisis was in full swing. India, however, remained unscathed by the currency crisis, partly because of capital controls. Like its parent, the bank's Indian entity focused on investment banking, wealth management, and share brokerage services. Also, Credit Suisse AG has Indian operations under the branch model and not as a wholly-owned subsidiary.

The bank is relatively small as compared to other European banks in India. Case in point, Credit Suisse has a balance sheet size of a paltry Rs 19,189 crore in March 2021 as against HSBC India's Rs 2.29 lakh crore. Foreign banks' share of the pie is small in India with a market share of less than 4-5 per cent in loans and advances. "There could be some impact on the Indian entity in terms of future capital allocation by Credit Suisse AG," says a banker. But Credit Suisse's capital adequacy ratio in India is 34.62 per cent, which is far higher than the regulatory requirement of 9 per cent.

The Indian banking system is also quite resilient, with both banks and non-banks sitting on comfortable equity and liquidity. As per RBI data, the Indian banks' capital to risk-weighted assets ratio (CRAR) and common equity Tier 1 ratio were as high as 16.7 per cent and 13.6 per cent, respectively, in March 2022. The banks' overall gross NPAs have plummeted to a six-year low of 5.9 per cent, while the provisioning coverage ratio (PCR) for NPAs has jumped to 70.9 per cent in March 2022 from 67.6 per cent in March 2021.

Also read: Credit Suisse appoints Dixit Joshi as new CFO, Francesca McDonagh as COO

Also read: Credit Suisse in market spotlight despite moves to calm concerns