Banking Crisis

Investors Digest Credit Suisse Deal; UBS Shares Recover

Tom Burroughes Group Editor 21 March 2023

Investors Digest Credit Suisse Deal; UBS Shares Recover

Markets were initially rattled by the UBS purchase of Credit Suisse, and wondered whether this would be enough to erase worries. Equity prices later recovered, with UBS ending higher on the day.

Shares in UBS recovered to end the day about 1.2 per cent higher on the day after earlier being hit by concerns about what the Zurich-listed bank has taken on by its $3.2 billion purchase of crisis-hit Credit Suisse. Earlier yesterday, shares in UBS fell by as much as 11 per cent in early Swiss trade. Shares in Deutsche Bank, HSBC and Barclays were down between 2 and 3 per cent.

Gold prices – often a marker for investor stress – rose yesterday, reaching a record price in sterling at £1,645 ($2,012) per ounce before easing off a touch at the close.

"Like the 2008 banking crisis, the sudden loss of confidence in mainstream finance has thrown into focus the fact that bank deposits are debt, not property,” Adrian Ash, director of research at BullionVault, said. “From talking to new gold investors, including larger buyers, they are less concerned about price right now than by certainty of title. Wholesale bullion stands out as the most tradable of physical assets. It's the deep liquidity in gold, added to the security of outright ownership, which is driving this jump in new demand."

Markets were initially rattled by how the UBS/Credit Suisse deal, supported by Swiss authorities, wrote off the value of high-risk bonds. Under the terms of the all-share transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to SFr0.76/share for a total consideration of SFr3 billion ($3.32 billion). UBS said it will get SFr25 billion of downside protection from the transaction to support markets, purchase price adjustments and restructuring costs, and additional 50 per cent downside protection on non-core assets. (See a story here for the details.)

A controversial point has been the write-off in the value of the high-risk debt, or AT1 debt. Pimco has reportedly lost about $340 million on its holdings of AT1 debt (source: Reuters). The fund manager had about $807 million of the notes, while Invesco held about $370 million.

Commentators said some uncertainty has been taken away by UBS’s move, but the “shotgun” nature of the “marriage” and the background worries stirred by the demise of Silicon Valley Bank are concerning investors.

“The uncertainty over the long-term viability of Credit Suisse ended over the weekend when it was acquired by UBS – the solution which at face value offers the best chance of re-establishing stability in the Swiss banking system. However, while the Credit Suisse risks have been eliminated, the long-term implications of the deal will only become clear over time,” Capital Economics, a UK-based consultancy, said in a note.

“The price of SFr0.76 per share is a huge discount on Friday’s close (SFr1.86), let alone on the price two years ago (~SFr12) which means the market capitalisation of the bank fell from around SFr30 billion to SFr3 billion over a two-year period,” it continued. 

“While the deal was ostensibly voluntary, it was in fact imposed on the two banks by the Swiss authorities. It was backed by an additional SFr100 billion liquidity line from the Swiss government and also a substantial `loss guarantee’. As the Swiss government explained, this guarantee was required because as well as some valuable assets, UBS has also taken on some which are `difficult to assess’ and on which `losses may occur’,” it said.

“While this outcome came sooner than we had anticipated, it is not a surprise. On the contrary, a solution along these lines has long been discussed and was, indeed, the most obvious one given that the Swiss authorities had to deal with the problem. (It is often said that banks are “global in life but national in death.”) Clearly the liquidity lifeline which the SNB provided last Wednesday had not stopped the deposit flight,” the group said. 

Capital Economics concluded: “This deal could draw a permanent line under the Swiss banking sector’s problems. Credit Suisse has been absorbed into a healthier bank with much deeper pockets. This should provide time for the UBS management to reform Credit Suisse and shrink its troubled investment bank. However, the track record of shotgun marriages in the banking sector is mixed. Some, such as the 1995 purchase of Barings by ING, have proved long-lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank while others have proven very difficult to implement.”

Not 2008
Stéphane Monier, chief investment officer at Lombard Odier, said fears that these events are a repeat of 2008 are unwarranted.

"The complex global UBS-Credit Suisse deal was pushed through in a weekend. The US Treasury, Fed and Federal Deposit Insurance Corporation quickly guaranteed all deposits in the failed US banks, and offered all banks a one-year lending facility against collateral (the assets used to back the loan) valued at par. This means any lender in need of liquidity would not have to undermine its capital by selling securities at a loss. Fifteen years ago, and again during the European sovereign debt crisis, regulators imposed haircuts on the assets held by institutions seeking access to rescue packages," he said in a note.

"The other significant difference from 2008 is that ‘crisis’ indicators such as interbank lending conditions remain relatively healthy and credit default swap (CDS) spreads for most banks – the annual amount holders must pay to insure against default of a bank’s debt – have widened, but not to levels that would indicate that markets anticipate deeper problems," he added.

Thomas McGarrity, head of equities for RBC Wealth Management in the UK, said: “We think the further broad sell-off reflects a higher risk premium being attached to bank stocks, rather than intensifying contagion concerns which we believe should be somewhat calmed.”

“The market is assessing various ripple effects, including the economic outlook, given the potential tightening of lending conditions, as well as the path for interest rates and the likelihood of higher funding costs and their implications for banks’ earnings estimates. Layered on top of that is positioning; we're likely seeing an unwind of overweight positions reflecting the heightened uncertainty,” he said.

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