Credit Suisse: A threat to India and the world?

Credit Suisse

Just a week ago, 14 years after Lehman Brothers’ failure precipitated a worldwide financial catastrophe, the liquidation of its brokerage section was completed. More than $115 billion was distributed among Lehman’s 1.1 lakh clients, secured and unsecured creditors, the trustee in charge of the brokerage’s liquidation, and his law firm.

Lehman Brothers was the fourth-largest investment bank in the United States until declaring bankruptcy on September 15, 2008, leaving over $600 billion in debt.

On the other side of the Atlantic, rising concerns about the financial health of Credit Suisse, Switzerland’s second-largest institution, have fueled speculation about whether the world should brace itself for another Lehman-style financial meltdown. During the 2008 financial crisis, its larger Swiss counterpart, UBS Group, received a governmental bailout.

Credit Suisse has been assuring its employees, counterparties, clients, and investors of the firm’s robust liquidity and capital position. However, its shares have dropped 55 per cent in the last year, giving it a market valuation of around $11 billion. This is cheaper than the rates charged by numerous Indian banks, including HDFC Bank, Axis Bank, SBI, ICICI Bank, and IndusInd Bank.

Credit Suisse, one of Europe’s largest banks, with $1.6 trillion in assets under management by the end of 2021. In addition to a domestic Swiss bank, it includes wealth management, investment banking, and asset management businesses.

The Swiss central bank has identified it as one of the country’s global systemically important institutions, the bankruptcy of which would result in “severe damage to the Swiss economy and financial system.”

Credit default swaps (CDS), a product that reflects the cost of insuring the bank’s bonds, reached their highest level since 2009. Ulrich Koerner, who took over as CEO in August, is working to restore the bank’s profitability.

Credit Suisse has lost roughly $4 billion in the last three quarters alone, while rating downgrades have boosted its borrowing costs.

Last year, the bank lost $5.5 billion due to the failure of the US family office Archegos Capital Management. It incurred further losses as a result of financing to the now-defunct supply-chain finance business Greensill Capital.

Multiple changes in senior leadership since 2020, as well as high-profile risk management failures, have drawn investor attention. When it reports its third-quarter results on October 27, the bank is expected to outline a transformation plan.

Credit Suisse has $735 billion in total assets at the end of June. The incoming CEO’s strategy review will focus on improving the bank’s main wealth management division and reducing investment banking to a “capital-light, advisory-led” sector. Asset and business sales are also planned.

It is also considering strategic alternatives for its securitised goods group, a trading operation. Analysts anticipate that it might face a $6 billion capital gap.

According to Amit Jain, Co-Founder of Ashika Global Family Office Services, at this point, Credit Suisse can only be supported by the government. He believes the European economy will be hit hard. Indian markets may see a brief downturn.

Also Read | Hong Kong: Credit Suisse loses five additional private bankers

Given the unfavourable news flow, Citigroup analysts believe that any new strategy plan faces high execution risk. Widening credit spreads, they added, can intensify market worries, harm counterparty trust, and raise funding costs in the short term.

In the long run, the drop in its share price will further erode its capacity to raise funds. It will also create a wrench in Credit Suisse’s plans for any investment banking reorganisation.

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