After a long negotiation over the weekend, financial markets were poised for relief on Monday after UBS Group AG (SIX:UBSG) agreed to buy Credit Suisse (SIX:CSGN) Group AG in a rescue orchestrated by the state, while major central banks announced a co-ordinated move to shore up liquidity in the financial system.
- UBS agreed to buy its embattled rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) Sunday.
- The terms of the deal will see Credit Suisse shareholders receive 1 UBS share for every 22.48 Credit Suisse shares they hold.
- The Swiss National Bank also pledged a loan of up to 100 billion Swiss francs ($108 billion) to support the takeover.
UBS will buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) and agreed to assume up to $5.4 billion in losses as it winds down the smaller peer's investment bank after a shotgun merger engineered by Swiss authorities.
The terms of the deal will see Credit Suisse shareholders receive 1 UBS share for every 22.48 Credit Suisse shares they hold.
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure,” said UBS Chairman Colm Kelleher in a statement.
Done deal now with more to come?
Big Fish Eats Small Fish
UBS initially offered to buy Credit Suisse for around $1 billion Sunday, according to multiple media reports. Credit Suisse reportedly balked at the offer, arguing it was too low and would hurt shareholders and employees, people with knowledge of the matter told Bloomberg.
By Sunday afternoon, UBS was in talks to buy the bank for “substantially” more than 1 billion Swiss francs, sources told CNBC’s Faber. He said the price of the deal increased throughout the day’s negotiations.
Credit Suisse lost around 38% of its deposits in the fourth quarter of 2022 and revealed in its delayed annual report early last week that outflows have still yet to reverse. It reported a full-year net loss of 7.3 billion Swiss francs for 2022 and expects a further “substantial” loss in 2023.
Market Reactions
The Swiss National Bank pledged a loan of up to 100 billion Swiss francs ($108 billion) to support the takeover. The Swiss government also granted a guarantee to assume losses up to 9 billion Swiss francs from certain assets over a preset threshold “in order to reduce any risks for UBS,” said a separate government statement.
Switzerland’s standing as a financial centre is shattered – the country will now be viewed as a financial banana republic. The Credit Suisse debacle will have serious ramifications for other Swiss financial institutions. A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away.
In an early sign that risk appetite was set for a bounce, the euro, sterling and the Australian dollar all edged up, data from trading platform EBS and Reuters Dealing showed. Crypto currency bitcoin rose about 1.5%. S&P 500 futures rose 0.6% in bumpy early trade in Asia.
The Week Ahead
Billionaire investor Warren Buffett, who helped rescue some banks during the 2008 financial crisis, has held discussions with senior U.S. officials about the banking crisis, a source said on Saturday. Buffett has yet to prop up any of the regional banks.
The Federal Deposit Insurance Corporation (FDIC), the U.S. regulator that took over Silicon Valley Bank and Signature Bank, made some progress on Sunday in returning one of them to the private sector.
The FDIC failed, however, in its effort to find a buyer for the entirety of Silicon Valley Bank this weekend and will now seek new bids for parts of the bank on Wednesday and Friday.
The Fed and Bank of England are due to hold meetings on interest-rate policy this week, when they will have to strike a difficult balance between their fight against inflation and worries about financial turmoil. Analysts polled expect both banks to raise rates by 25 basis points.
A pause, to maintain or raise interest rates?
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