On Sunday, UBS, Switzerland's largest bank, agreed to purchase its long-time struggling competitor, Credit Suisse, for approximately $3.2 billion. This acquisition is seen as the most drastic move yet to address the financial turmoil that has swept the world in the past week.
The Swiss government brokered the deal in just a few days, representing a stunning fall for Credit Suisse, a 166-year-old institution that was once a source of national pride. This acquisition is one of the most significant shake-ups in the global banking sector since the 2008 financial crisis when major financial institutions were acquired by rivals to avoid catastrophic meltdowns.
Credit Suisse was established in 1856 to fund Switzerland's railway network and rose to the top of the financial industry, sometimes competing with giants such as JPMorgan Chase. However, the bank has also been plagued by scandals, management changes, and unsuccessful attempts at reform that have damaged its reputation, led to lawsuits, and left it struggling with losses. The recent banking stock market rout, triggered by the collapse of Silicon Valley Bank earlier this month, has brought Credit Suisse's long-standing vulnerabilities to light and accelerated its demise, underscoring the extreme anxiety among investors.
"On Sunday, Colm Kelleher, the chairman of UBS, told analysts that it was a historic day for Switzerland, but unfortunately, it was a day they had hoped would never come."
Swiss government leaders and regulators announced on Sunday that the deal was the most effective solution to reassure investors regarding the stability of the country's financial sector and the potential risk of its issues spreading beyond its borders.
"At a news conference, Karin Keller-Sutter, a member of the Swiss Federal Council, stated that UBS's acquisition of Credit Suisse has established a basis for greater stability in both Switzerland and the global economy."
In a joint statement, Janet L. Yellen, the Treasury Secretary, and Jerome H. Powell, the Chair of the Federal Reserve, expressed their support for the Swiss authorities' announcements to uphold financial stability.
According to the terms of the agreement, UBS will offer 0.76 of its shares for each share of Credit Suisse, amounting to approximately 3 billion Swiss francs or $3.2 billion, which is only a small portion of its market value as of Friday.
The Swiss National Bank agreed to lend up to 100 billion Swiss francs to provide financial support for UBS to carry out the deal. In addition, the Swiss financial regulator, Finma, took several extraordinary steps to help UBS quickly acquire its main competitor, including wiping out $17 billion worth of Credit Suisse’s bonds and eliminating the need for UBS shareholders to vote on the deal.
The deal was put together hastily, and UBS informed analysts that they had not had time to fully model all of the financial impacts of buying Credit Suisse.
As Credit Suisse's stock and bonds weakened in the past week, analysts and investors increasingly speculated that the Swiss government would force the firm to merge with UBS to prevent chaos. In fact, several times on Sunday, UBS executives emphasized that Swiss regulators had initiated the negotiations.
According to a source familiar with the negotiations, last week depositors withdrew billions of dollars from Credit Suisse, causing other financial institutions to end their deals with the bank. This led regulators to realize that Credit Suisse may not be able to continue operating without a government takeover or a takeover by UBS.
Both parties were uncertain if they could reach a deal until the last minute due to disagreements over the terms. On Saturday night, UBS offered to buy Credit Suisse for approximately $1 billion, but the bank's board rejected the proposal. Another source familiar with the negotiations stated that Credit Suisse claimed that its real estate holdings alone were worth around that amount.
One of the individuals familiar with the deal revealed that UBS was the only feasible option for Credit Suisse, as the Swiss government was only willing to offer special protection to a Swiss institution.
In the past few months, Credit Suisse had been struggling to recover, but two events last week led to its downfall. Firstly, on Tuesday, the bank disclosed the presence of "material weaknesses" in its financial reporting. Secondly, it was caught up in the widespread panic surrounding the health of banks. As share prices in banks worldwide plummeted following the collapses of Silicon Valley Bank and Signature Bank, markets grew increasingly wary of Credit Suisse.
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Throughout the week, prices for Credit Suisse shares and bonds suffered significant drops, as did the cost of insuring its debt against default. Despite attempts by Swiss regulators to bolster investor confidence, the situation remained grim. On Thursday, Credit Suisse announced that it would access a $54 billion lifeline from the Swiss central bank in an effort to prevent a catastrophe. However, by Wednesday, the Swiss government had already approached UBS and asked them to consider purchasing Credit Suisse.
Credit Suisse had been executing an ambitious turnaround plan for several months, aiming to downsize the firm. This included spinning out a large portion of its investment bank, slashing thousands of jobs, and cutting other expenses.
As part of the deal, UBS will effectively wind down Credit Suisse's investment bank, and the combined firm's operations in that area are set to account for no more than a quarter of its assets eventually.
The breakup of Credit Suisse is the latest repercussion of Silicon Valley Bank's collapse. Despite being a relatively small lender that mainly operated in the United States, SVB's sudden downfall rekindled concerns among investors and depositors about potential risks lurking at other institutions, particularly as central banks increase rates to combat mounting inflation.
Last week, shares in banking stocks worldwide suffered significant declines, wiping out almost half a trillion dollars in market value. Regulators and major banks have taken extraordinary measures to avoid more significant disasters, including the largest US banks leading a $30 billion rescue of midsize First Republic Bank.
Credit Suisse has been hit harder than any other international lender, as evidenced by its shares reaching an all-time low last week due to a continuous stream of negative news. The recent announcement of a deal indicates the downfall of one banking giant while bolstering the strength of another.
Credit Suisse, established in 1856, played a crucial role in Swiss finance, while UBS was formed from the consolidation of smaller banks throughout Switzerland over several decades.
Both companies had aspirations of becoming part of the global banking elite and pursued this goal by purchasing renowned American brokerage firms. Credit Suisse acquired First Boston and Donaldson, Lufkin & Jenrette, while UBS took over Dillon, Read.
Eventually, both companies achieved their goal and rose to the top of the global banking industry. However, during the 2008 financial crisis, they suffered significant losses due to failed investments in the American housing market.
While UBS was able to recover, Credit Suisse struggled and faced numerous crises, resulting in billions of dollars in fines for their involvement in various scandals, such as foreign exchange market manipulation, foreign bribery, and drug money laundering. One of its former chief executives, Tidjane Thiam, was removed from his position due to the surveillance of employees.
Furthermore, Credit Suisse has experienced embarrassing trading disasters, such as the loss of $5.5 billion tied to the collapse of the investment firm Archegos. By the time the bank announced its turnaround initiative in October, investors and analysts were doubtful that the bank could succeed, even with a new chief executive (its third in three years) and $4 billion in new capital led by the state-owned Saudi National Bank.
However, a continuous stream of negative news followed, including the disclosure that Credit Suisse had lost $147 billion worth of customer deposits in the last quarter of 2022. The collapse of Silicon Valley Bank, located 5,800 miles away, added to the shockwave in the global banking sector.
Credit Suisse's concerns were further exacerbated by untimely events. On Tuesday, the bank revealed "material weaknesses" related to its financial reporting, but maintained that its accounting was sound. On Wednesday, the chairman of Saudi National Bank, Ammar al-Khudairy, stated that his bank would not invest further in Credit Suisse, although he later clarified that this was due to regulatory reasons. Nevertheless, investors were unsettled, as Credit Suisse's largest shareholder could not be relied upon to participate if the bank attempted to raise additional capital.
By Thursday morning, Swiss regulators had publicly certified the strength of Credit Suisse's balance sheet, and the bank announced that it would avail of the Swiss central bank's support. However, the bank's stock and bond prices continued to decline, and the cost of purchasing insurance contracts against the possibility of the firm's default rose to alarmingly high levels.
By Friday, analysts predicted that despite the relative stability of Credit Suisse's balance sheet, the continued decline in confidence would compel the firm to take more drastic measures.
Sunday's agreement is, in some ways, advantageous for UBS as it cements its position as the top bank in Switzerland and has the potential to strengthen its core wealth management business, while also acquiring Credit Suisse's highly respected Swiss retail banking division.
"The total value of Credit Suisse's parts is far greater than what UBS is paying," Johann Scholtz, an analyst at Morningstar, stated in an email.
However, UBS has the responsibility of largely closing down its competitor's investment bank and will most likely have to make significant redundancies among Credit Suisse's staff.
Some analysts have also raised concerns that UBS may face legal action associated with the takeover. Nevertheless, executives have responded that Swiss government regulators have made decisions regarding some of the most contentious issues.
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