Credit Suisse Group AG, which is ranked as the world's 45th largest bank in terms of assets, is facing problems and there's a growing fear that if the bank collapses, it could give rise to the next world financial crisis. The situation is increasingly getting compared with the Lehman Brothers situation which triggered the global financial crisis of 2008.
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 against SBI's $694 billion, per S&P Global rankings of the world's top 100 banks.
Stock market indices like Sensex or Nifty losing or gaining over 1,000 points still make a strong impression on most mutual fund sectors. It is another matter that huge changes have been the norm in the stock market lately.
“We do see some European banks under pressure due to their widening CDS (Credit default swaps) levels and nose dive in share prices. We have to note that this is not like 2008. Back then, the crisis started with a credit problem. There was too much credit in one segment which was not doing well and became stressed. That became a solvency and liquidity issue,” says Arvind Chari, CIO, Quantum India, UK.
“The interest rate cycle is going up very fast globally. It obviously has created a ripple effect in the global economy that we are seeing unfold in the European banks. No one knows whether it will be like 2008. It definitely is not like that yet, but it can become bigger. Central banks globally want inflation to come down at any cost,” says Sonam Udasi, Senior Fund Manager, Tata Mutual Fund. “Usually, after 2008 we have seen central banks stepping in to help.
“Usually, after 2008 we have seen central banks stepping in to help. We will have to see how that happens in this scenario. If many such banks were to come out with issues, then the pressure would build. Even though things look far better in India, we are a globalised economy and the impact will be there. Hence, we expect the market to remain volatile in the short term,” says Sonam Udasi, Senior Fund Manager, Tata Mutual Fund.
Credit Suisse: what's wrong with it?
The bank is running into huge losses. The bank's financials revolved around a loss in 2021 with a loss of$1.80 billion. That is a decline of 163 from 2020. The bank's profits were$29.04 billion in 2021 as against$ 32.38 billion in 2020. Unfortunately, there has been no stop-up in losses in the first two quarters of 2022 as stress on financials has held on. The 166- year-old bank has imputed the disappointing performance to the lacklustre demonstration of the investment banking division and a rise in action 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.
Is India going to be affected by it?
World crisis, financial crisis is always a concern but because Credit Suisse's India operations are limited, the risk to the Indian banking system isn't grave. Credit Suisse AG has an Indian reality. It entered India in 1997 when the East Asian currency extremity was in full swing. India remained unscathed by the currency extremity, incompletely because of capital controls.
The Indian banking entity focused on investment banking, wealth administration, and share brokerage services. Also, Credit Suisse AG has Indian operations under the branch model and not as a wholly- had subsidiary.
The Indian banking system is flexible enough, 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 percent 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.
