Mar 20, 2023
UBS Slumps After Agreeing to Buy Credit Suisse in Historic Deal
(Bloomberg) -- UBS Group AG shares gained as investors weighed up the pros and cons of its Credit Suisse Group AG takeover, a deal that forces the smaller bank to wind down assets and restructure while handing over valuable assets at a bargain price.
The government-brokered, 3 billion Swiss franc ($3.2 billion) deal signed late Sunday was intended to put an end to a crisis of confidence at Credit Suisse and stem contagion through the global financial system that started with the collapse of Silicon Valley Bank this month. The deal values Credit Suisse at a fraction of its closing price, with a raft of government backstops and guarantees to help ease the pain for UBS.
Yet the takeover also complicates Chief Executive Officer Ralph Hamers’ investor pitch: that UBS is drama-free, profitable and focused on the lucrative provision of services to the wealthy. Now, buybacks are on pause and it will likely need years to work through the integration. On the upside, it’s gaining assets such as the Swiss Universal Bank at a deep discount, as well as access to Credit Suisse’s roster of wealthy clients and sizeable asset base.
“UBS has traditionally operated a high returning, high quality, stable franchise,” analysts including Tom Hallett at Keefe, Bruyette & Woods wrote in a note Monday. “The acquisition of Credit Suisse throws much of this into question.”
From making a predictable profit of between $4 billion and $8 billion every year for the past five years, UBS must now focus on tasks such as winding down Credit Suisse’s investment bank and shedding an as-yet-unknown number of jobs over the next several years.
Ratings company S&P cited “execution risk” as it lowered UBS’s outlook to negative from stable late Monday, though it also said the bank’s management “will prudently execute the CS integration.”
UBS ended the day up 1.3% in Zurich, after swinging between declines of 16% and gains of 6.9% earlier in the day in a wild ride that also moved a broader index of Europen lenders. The cost of insuring UBS’s debt against default rose.
Hallett listed further uncertainties that UBS now faces, ranging from the implementation of new, higher capital requirements due to the bigger size, to the future of share buybacks, the use of Swiss National Bank liquidity lines, and the pace of deleveraging at the investment bank.
UBS had planned to repurchase more than $5 billion of shares this year.
At the same time, the knock-down price tag for Credit Suisse and the presence of government guarantees means there could be significant upside for UBS once the initial heavy lifting is completed. The combination of the two banks creates a wealth-management giant with some $5 trillion in invested assets.
“I think UBS is getting a terrific prize here and the market will soon realize that,” said Jerry Del Missier, Chief Investment Officer of Copper Street Capital, in an interview with Bloomberg Television. “The derisking of the investment bank had already begun and was well underway.”
The Swiss National Bank is offering a 100 billion-franc liquidity assistance line to UBS while the government is granting a 9 billion-franc guarantee for potential losses from assets UBS is taking over. Regulator Finma said about 16 billion francs of Credit Suisse bonds, known as AT1s, will become worthless to ensure private investors help shoulder the costs.
That step represents something of a special case in Europe. A total write-down of additional tier 1 bonds is not the norm, with risky bonds at most other banks in Europe and the UK having more protections, according to Bloomberg Intelligence.
Read More: Credit Suisse’s AT1 Bond Wipeout Seen as an Exception in Europe
The European Banking Authority weighed in on Monday, saying in a statement that “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down.”
The rescue plan for Credit Suisse, negotiated in hastily arranged crisis talks over the weekend, seeks to address client outflows and a massive rout in the stock and bonds over the past week following the collapse of smaller US lenders. A liquidity backstop by the Swiss central bank mid-week failed to end a market drama that threatened to send counterparties fleeing, with potential ramifications for the broader industry.
The fusion is an historic event for the nation and global finance. UBS traces its roots back through some 370 separate institutions over 160 years, culminating in the merger of the Union Bank of Switzerland and the Swiss Bank Corporation in 1998. After emerging from a state bailout during the 2008 financial crisis, UBS built a reputation as one of the world’s largest wealth managers, catering to high- and ultra-high net worth individuals globally.
“It’s positive news that a deal could be found as there were not many alternatives, and a nationalization or unwinding of Credit Suisse would likely have increased sector risks,” said analysts including Flora Bocahut at Jefferies said. “However, UBS embarks on significant execution risk.”
--With assistance from Luca Casiraghi, Marion Halftermeyer, Marion Dakers and Daniel Taub.
(Updates with S&P outlook change in sixth paragraph.)
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