LONDON, March 20 (Reuters) – UBS Group (UBSG.S) has become Switzerland’s only global bank with a state-backed bailout of its smaller competitor Credit Suisse, a risky bet that makes the Swiss economy more dependent on a single lender.
The unprecedented move, announced late Sunday in Zurich, capped a race against time by regulators to avert a meltdown in global markets. Switzerland is providing more than 160 billion francs ($173 billion) in loans and guarantees to shore up the new group and protect itself from further risks that undermine the lender.
The deal — the first bailout of a global bank since the 2008 financial crisis — gives UBS enormous clout and frees it from its main competitor. It will change the banking landscape in Switzerland, where Credit Suisse and UBS branches are scattered everywhere, sometimes just meters apart.
The two lenders have been pillars of global finance for decades. The banks, two of the most systemically important in global finance, together hold assets of up to 140% of Switzerland’s gross domestic product in a country heavily dependent on financing for its economy.
After the 2008 financial crash, politicians vowed never to bail out banks again. The Credit Suisse bailout, orchestrated with public money, shows the banks’ continued vulnerability and how their problems can quickly rebound to their home country.
But it’s also removing a Wall Street competitor as UBS plans to downsize much of Credit Suisse’s investment bank.
“Under normal circumstances I would say this is an absolutely fantastic deal for UBS,” said Johann Scholtz, equity analyst at Morningstar, Coverage European Banks, Amsterdam. “In the current environment, it’s a bit more complicated because there’s a lot of uncertainty in the markets in general.”
REVERSAL OF FORTUNE
Shortly after the announcement, central banks including the Federal Reserve, the European Central Bank and the Bank of Japan said they would strengthen dollar-swap lines, helping to calm investors shaken by the turmoil in the banking sector. The collapse of two US banks and a plunge in Credit Suisse shares sent shockwaves through the markets last week.
UBS is paying $3.2 billion for 167-year-old Credit Suisse and absorbing at least $5.4 billion in losses from unwinding its portfolio of derivatives and other risky assets. Credit Suisse had a market value of around $8 billion as of Friday.
Credit Suisse Additional Tier 1 bondholders will be wiped out and placed second to equity holders, who will receive at least some UBS stock, in a controversial move.
It marks a radical reversal in fortunes for the banks. During the great financial crash, it was UBS, not Credit Suisse, that needed government support.
The fortunes of the banks diverged greatly in the past year. UBS made a profit of $7.6 billion in 2022 while Credit Suisse lost $7.9 billion. Credit Suisse shares are down 74% year-on-year, while UBS shares are relatively flat.
UBS becomes the undisputed global leader in wealth management for wealthy individuals, with UBS’s leading position in China now complemented by Credit Suisse’s strength in the rest of Asia, the fastest growing region. UBS also retains the jewel in the crown of Credit Suisse, the home bank.
“In the past, when discussing a deal between Credit Suisse and UBS, concentration was a sticking point, particularly in the domestic market,” Morningstar’s Scholtz said. “It’s also the most stable part of the business that generates quite a bit of money. If UBS isn’t committed to going public, it might make sense for them to keep it, there’s a lot of synergy.”
UBS also prevailed against a major competitor in securities trading. UBS generated $7.1 billion in revenue from buying and selling stocks, currencies and bonds. Credit Suisse booked around USD 3.2 billion last year.
EVEN SWISS
The demise of Credit Suisse dealt a blow to Switzerland’s reputation in the banking sector and sent shock waves through the global financial community.
At a news conference announcing the deal, Treasury Secretary Karin Keller-Sutter defended the bailout, saying it was good for Credit Suisse account holders, including her. She said she also did banking at UBS. This choice of banks will end soon.
“There are risks in this solution,” she acknowledged, downplaying concerns about the size of the new bank. Any alternative to solving Credit Suisse’s problems risks “irreparable economic turbulence”.
UBS chairman Colm Kelleher, sitting to her right, said the new group would be stripped of risks like investment banking to fit in with UBS’s conservative culture.
“A new UBS will remain rock solid,” he said.
Credit Suisse chairman Axel Lehmann, on the other hand, was dejected as his bank failed to recover from a series of scandals and losses. Late last year, speculation that the bank would go bust prompted customers to withdraw tens of billions, sealing its fate.
He described Sunday as a “historic, sad day”.
Staff at the Zurich headquarters are preparing for massive job cuts with potentially 10,000 jobs at stake, sources told Reuters on Saturday.
Nevertheless, it will not be easy for UBS.
The bank faces risk to complete the deal and potential litigation costs while regulators may ask the lender to hold more capital going forward, Jefferies analysts said.
Crucially, management will be distracted by this deal for many months, maybe years, they said.
“We will change, but we will not change that much,” said UBS boss Ralph Hamers, who will lead the new banking giant. “We remain Swiss.”
($1 = 0.9268 Swiss Francs)
Reporting by John O’Donnell and Stefania Spezzati; Additional reporting by Carolina Mandl, Chiara Elisei, Lananh Nguyen, Saeed Azhar and Tom Sims; Writing by Elisa Martinuzzi
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