Bank stocks and bonds tumbled Monday after UBS Group sealed a state-backed takeover of troubled competitor Credit Suisse Group AG, a deal orchestrated in an attempt to restore confidence in a battered sector.
In a package developed by Swiss regulators on Sunday, UBS Group AG will pay 3 billion Swiss francs ($3.24 billion) for the 167-year-old Credit Suisse Group AG and assume up to $5.4 billion in losses.
Credit Suisse shares fell 62 percent in premarket trading to a new low, while UBS lost 7.1 percent. Those sharp moves followed a day of heavy selling in Asian financial markets, as investors’ early optimism about official efforts to stem a banking crisis quickly evaporated. Once markets opened up, shares in UBS fell as much as 16 percent in early trading, the highest level since September 2008.
In particular, investor attention has shifted to the massive blow some Credit Suisse bondholders would receive from the UBS acquisition, raising concerns about other key risks, including contagion, the fragility of US regional banks and the challenges for central banks in their quest to control inflation and financial risk.
“It should be clear that after more than a week of banking panic and two interventions organized by the authorities, this problem will not disappear. On the contrary, it has become global,” said Mike O’Rourke, chief market strategist at Jones Trading.
“The reports of UBS acquiring Credit Suisse will likely compound Credit Suisse’s problems by moving them to UBS.”
As part of the deal, the Swiss regulator decided that Credit Suisse’s additional Tier 1 bonds (AT1 bonds) with a notional value of $17 billion would be valued at zero. the acquisition agreement announced on Sunday.
Credit Suisse’s Additional Tier 1 bonds fell sharply in early European trading, with some dollar-denominated issues being offered at 2 cents on the dollar, Tradeweb data showed.
The fall in Swiss banks’ shares comes on top of what was already a tough day for banks as investors shrugged off previous promises from major central banks to provide dollar liquidity to stabilize the financial system last weekend.
Standard Chartered Plc and HSBC shares each fell more than 6 percent in Hong Kong on Monday to more than two-month lows, with HSBC seeing an opportunity to post its biggest one-day drop in six months. The MSCI index for financial stocks in Asia ex-Japan fell 1.3 percent.
The shotgun Swiss bank marriage is backed by a massive government guarantee, which helps prevent what would have been one of the biggest bank collapses since the collapse of Lehman Brothers in 2008.
Pressure on UBS helped seal Sunday’s deal.
“It’s a historic day in Switzerland, and frankly we hoped it wouldn’t come,” UBS chairman Colm Kelleher told analysts on a conference call. “I want to make it clear that while we have not entered into discussions, we believe this transaction is financially attractive to UBS shareholders,” said Kelleher.
UBS CEO Ralph Hamers said many details still need to be worked out.
“I know there are still questions we haven’t been able to answer,” he said. “And I understand that and I even want to apologize for it.”
In a global response not seen since the height of the pandemic, the Fed said it had joined central banks in Canada, England, Japan, the EU and Switzerland in a coordinated move to improve market liquidity. The European Central Bank pledged to support eurozone banks with loans if necessary, adding that the Swiss bailout of Credit Suisse was “instrumental” in restoring calm.
On Monday, Credit Suisse’s banking operations appeared to be continuing as usual at its main offices in Asia.
Monetary authorities in Singapore and Hong Kong, where Credit Suisse hosts major regional offices, said separately that the Swiss bank’s operations continued without interruption.
And Credit Suisse urged its staff to get to work, according to a memo to staff seen by Reuters.
In a separate memo, the bank said that, as part of the acquisition, should job cuts prove necessary, it would be communicated to staff as per guidelines. The bank will also pay bonuses as previously communicated and on schedule, the memo added.
However, Credit Suisse staff who arrived for work in Hong Kong and Singapore on Monday morning were concerned about budget cuts and customer retention.
Problems remain in the US banking sector, where banking stocks remained depressed despite a move by several major banks to deposit $30 billion into First Republic Bank, an institution rocked by the bankruptcy of Silicon Valley and Signature Bank.
On Sunday, First Republic saw its credit ratings downgraded deeper to junk status by S&P Global, which said deposit infusions may not solve liquidity problems.
There are also concerns about what happens next at Credit Suisse and what that means for investors, customers and employees.
In the memo to employees, Credit Suisse said once the acquisition is complete, wealth management clients may consider moving some assets to another bank if concentration is an issue.
The deal will also make UBS’s only global bank in Switzerland and the Swiss economy more dependent on a single lender.
“The debacle with Credit Suisse will have serious consequences for other Swiss financial institutions. A nationwide reputation for prudent financial management, good regulatory oversight and, quite frankly, being a bit stodgy and boring about investments has been wiped out,” said Octavio Marenzi, CEO of Opimas, in Vienna.
UBS chairman Kelleher told a media conference that it will wind down Credit Suisse’s investment bank, which has thousands of employees worldwide. UBS expects annual cost savings of about $7 billion by 2027.
The Swiss central bank said Sunday’s deal includes 100 billion Swiss francs ($108 billion) in liquidity support for UBS and Credit Suisse.
Credit Suisse shares lost a quarter of their value last week. The bank was forced to tap $54 billion in central bank funding as it attempted to recover from scandals that undermined confidence.