© Reuters. Credit Suisse chairman of the board of directors Axel Lehmann, UBS chairman of the board of directors Colm Kelleher and federal counselor and head of the federal department of finance Karin Keller-Sutter attend a press conference on Credit Suisse af
By John O’Donnell and Stefania Spezzati
LONDON (Reuters) – UBS Group emerged as Switzerland’s only global bank with a state-backed bailout of smaller peer Credit Suisse, a risky bet that makes the Swiss economy more dependent on a single lender.
The unprecedented move announced Sunday night in Zurich capped a race against time for regulators to prevent a collapse in global markets. Switzerland pledges more than 160 billion francs ($173 billion) in loans and guarantees to back the new group, protecting it against new risks that undermine the lender.
The transaction, the first bailout of a global bank since the 2008 financial crisis, gives UBS enormous leverage, shedding its main rival. It will change the banking landscape in Switzerland, where Credit Suisse and UBS branches are scattered everywhere, sometimes just a few meters apart.
The two lenders have been mainstays of global finance for decades. The banks, two of the most systemically relevant in global finance, have combined assets of up to 140% of Swiss gross domestic product in a country that is highly dependent on finance for its economy.
Following the 2008 financial crisis, politicians vowed never to bail out banks again. The Credit Suisse bailout, orchestrated with public money, shows the continued vulnerability of banks and how their problems can quickly reverberate back home.
But it also cuts out a Wall Street competitor, with UBS planning to wind down much of Credit Suisse’s investment bank.
“Under normal circumstances, I would say this is an absolutely fantastic deal for UBS,” said Johann Scholtz, an equity analyst at Morningstar, which covers European banks, Amsterdam. “In the current environment, it’s a bit trickier as there’s a lot of uncertainty in the markets overall.”
INVESTMENT OF FORTUNES
Shortly after the announcement, central banks, including the Federal Reserve, the European Central Bank and the Bank of Japan, said they would improve dollar swap lines, helping to calm investors affected by the turmoil in the banking sector. . The bankruptcy of two US banks and the fall in Credit Suisse shares have sent shock waves through the markets over the past week.
UBS will pay $3.2bn for the 167-year-old Credit Suisse, taking at least $5.4bn in losses from the liquidation of its portfolio of derivatives and other risky assets. Credit Suisse had a market value of about $8 billion at Friday’s close.
Credit Suisse’s additional Tier 1 bondholders will be removed and, in a controversial move, made secondary to shareholders who will receive at least some UBS shares.
It marks a radical turn in the fate of the banks. During the great financial crisis, it was UBS and not Credit Suisse that needed state support.
Bank fortunes have diverged sharply over the past year. UBS made $7.6 billion in profit in 2022, while Credit Suisse lost $7.9 billion. Credit Suisse’s shares are down 74% from a year earlier, while UBS’s are relatively flat.
UBS becomes the undisputed global leader in money management for the rich, with UBS’s leadership position in China now complemented by Credit Suisse’s strength in the rest of Asia, the fastest growing region. UBS also gets the jewel in the crown of Credit Suisse, the national bank.
“In the past, when a deal between Credit Suisse and UBS was discussed, a sticking point was concentration, especially in the domestic market,” Morningstar’s Scholtz said. “It’s also the most stable part of the business, generating a lot of cash. If UBS isn’t required to do an IPO, it might make sense for them to keep it, there are a lot of synergies.”
UBS is also eliminating a big competitor in securities trading. UBS earned $7.1 billion in income from buying and selling stocks, currencies and bonds. Credit Suisse recorded about $3.2 billion last year.
STILL SWITZERLAND The demise of Credit Suisse has dealt a severe blow to Switzerland’s reputation in banking and sent shockwaves through global finance.
At a news conference to announce the deal, Finance Minister Karin Keller-Sutter defended the bailout, saying it was good for Credit Suisse account holders, including her. She said that she also did banking with UBS. That choice of banks will be over soon.
“This solution has risks,” he admitted, downplaying any concerns about the size of the new bank, arguing that any alternative to solving Credit Suisse’s problems risked “irreparable economic turbulence.”
Sitting to his right, UBS Chairman Colm Kelleher said the new group would be risk-free, like investment banking, to suit UBS’s conservative culture.
“A new UBS will still be rock solid,” he said.
Credit Suisse Chairman Axel Lehmann, by contrast, was dejected that his bank failed to recover from a series of scandals and losses. Late last year, speculation that the bank would go bust led clients to withdraw tens of billions, sealing its fate.
He described Sunday as a “historic and sad day.”
Employees at the Zurich headquarters are bracing for massive job cuts, with 10,000 jobs potentially at stake, sources told Reuters on Saturday.
Still, not everything will be smooth sailing for UBS.
The bank faces risks completing the deal, possible litigation charges, while regulators may ask the lender to hold more capital in the future, Jefferies analysts said.
Crucially, management will be distracted by this deal for many months, perhaps years, they said.
“We will change, but we won’t change that much,” said UBS chief executive Ralph Hamers, who will lead the new banking giant. “We will remain Swiss.”
($1 = 0.9268 Swiss francs)
