Switzerland’s largest bank UBS makes a $ 3.2 billion deal to buy out Credit Suisse: Report
Regulators forced UBS Group AG into the biggest banking deal in years when it agreed to acquire its longtime rival Credit Suisse Group AG for more than $3 billion in order to prevent a dangerous decline in confidence in the global banking system.
Since the global financial crisis of 2008, when institutions throughout the banking landscape were divided up and paired with rivals, frequently at the direction of regulators, the deal between the two pillars of Swiss finance marks the first megamerger of systemically significant global banks.
The Swiss government said that it will contribute more than $9 billion to cover any losses resulting from UBS’s acquisition of Credit Suisse. Additionally, the Swiss National Bank gave UBS access to more than $100 billion in liquidity to aid in the transaction.
Before the week’s opening of the Asian markets, Swiss officials were under pressure to complete the deal. They had to walk a tight line between getting the approval of the boards of the two banks for the sale and avoiding the regulator-led winding down of Credit Suisse, which may have been more painful and prolonged for the financial system.
An increasingly bleak picture at Credit Suisse sparked the urgency on the side of authorities. According to a person familiar with the situation, the bank had customer outflows of up to $10 billion per day last week.
Regulators were also concerned that Switzerland could become a new point of contagion for the world’s stress due to Credit Suisse’s bankruptcy. An enlarged dollar swap line, a form of global lending operation, was announced by a number of central institutions, including the Federal Reserve and the Swiss National Bank, hours following the UBS deal. The increase was referred to be “a crucial liquidity backstop to ease pressure in global funding markets.”
Axel Lehmann, chairman of Credit Suisse, claimed that the current bank problems, which originated in the United States, were too much to bear. Credit Suisse cannot continue to exist in its existing form, he declared, citing the recent deterioration and acceleration of trust loss.
Colm Kelleher, chairman of UBS, stated the company would reduce Credit Suisse’s investment banking operations and integrate them with its “conservative risk culture.” “Supports financial stability in Switzerland and creates significant sustainable value for UBS shareholders,” he claimed of the transaction. UBS announced, however, that it will halt its stock buyback program in order to better absorb the deal.
Following the abrupt fall of Silicon Valley Bank earlier this month, investors around the world began to look for vulnerabilities in the financial system. Due to years of self-inflicted scandals and trading losses, most notably the failure of two important clients in 2021, Greensill Capital and Archegos Capital Management, Credit Suisse was already at the top of many lists of problematic institutions.
Investors perceived a never-ending string of failures despite many CEO changes and promises of transformation.
The bank’s new management, many of whom came from UBS, took over last year and attempted a campaign of client reassurance while promising a restructure that would turn the firm around.
In order to finance a comprehensive revamp, the bank had just obtained $4 billion in new shares from the Saudi National Bank and other investors. But in the last months of 2022, customers were leaving in droves and taking $120 billion in assets under management with them.
Credit Suisse received a $54 billion lifeline from the Swiss National Bank last Thursday as a result of its bonds and stock price being in free fall. The liquidity line was quadrupled later that day, according to Switzerland’s finance minister, to ensure that the bank could survive into the weekend.
However, Swiss officials, as well as the regulators in the United States, the United Kingdom, and the European Union, who all oversee portions of the bank, believed it would go bankrupt this week if the situation wasn’t resolved, and they were worried that waning confidence may spread to other banks.
The financial watchdog in Switzerland, Finma, claimed Credit Suisse went through a “crisis of confidence.” In addition, it stated that “even if the bank remained solvent, there was a risk of it becoming illiquid, and it was necessary for the authorities to take action to prevent serious damage to the Swiss and global financial markets.”
According to Finma, bank operations would resume as usual on Monday “without any restrictions or interruptions.”
The two banks and the authorities started talking last Wednesday.
Regulators presented two options: bankruptcy or takeover. According to a person familiar with the situation, bankruptcy would be a lengthy affair, and UBS executives were concerned that it would damage the reputation of Swiss banking overall.
That sped up negotiations for a settlement with the Swiss government.
UBS had never wanted the two giants of Swiss finance to be forced into a marriage. There were a plethora of issues and scandals involving Credit Suisse. The “capital light” model that UBS had been developing for years—one based on charging fees for managing the finances of wealthy clients—was the antithesis of what it had in its massive investment bank.
It is the main competitor of UBS in the local Swiss banking system, but it also had other appealing features. In another era, a merger between the two could have sounded like an unfathomably monopolistic arrangement. UBS received a waiver from the Swiss authorities.
Additionally, UBS and Credit Suisse both have comparable operations and aspirations in Asia and a pool of wealthy clients for wealth management.
The investment bank is the unsightly area. Large portions of Credit Suisse’s activities were being wound down, and the advising division was going to be spun off into a new company led by banker and former board member Michael Klein.
However, according to the persons familiar with the situation, the Swiss government promised to participate in some of the losses that UBS would sustain when winding down the remaining spinoff, which is now in doubt.
According to persons acquainted with the offer, a consortium that included Saudi National Bank, Credit Suisse’s largest shareholder, made a last-ditch effort on Sunday to save the firm. The group put up a competing plan to give Credit Suisse about $5 billion. Bondholders of Credit Suisse would have been completely safeguarded under the scheme.
According to the people, the offer was flatly rejected by Swiss ministers. The shareholders requested the same government backstops, such as the liquidity line, as were being provided to UBS, but they were denied.
The stockholders’ agitation did have an impact. A previous UBS offer to pay around 1 billion Swiss francs, or approximately $1.1 billion, was eventually increased to 3 billion francs, paid in UBS shares. Even yet, that represents less than half of Credit Suisse’s final Friday market value.
Holders of Credit Suisse “additional tier 1” bonds worth $17 billion will also suffer significant losses. extra tier 1 bonds are securities that resemble bank bonds until the bank experiences financial difficulties, at which point they lose all value.
The debt that UBS will take on is reduced by billions with the elimination of the AT1 bonds. People familiar with the transaction claim that the math for UBS shareholders didn’t add up without wiping out those bonds.
One of the most important events in the banking industry since the last financial crisis is the conclusion of Credit Suisse’s nearly 167-year tenure. Additionally, it shows a fresh worldwide aspect of the storm in banking that began earlier this month with the abrupt demise of Silicon Valley Bank.
Despite recent initiatives to decrease its expansion and rein in risky activities like lending to hedge funds, Credit Suisse is a worldwide player in contrast to Silicon Valley Bank, whose activity was centered in a single geographic location and industry.
At the end of 2022, Credit Suisse had a balance sheet worth half a trillion dollars and almost 50,000 workers, including over 16,000 in Switzerland. It includes investment banking divisions in several cities, including New York, London, and Singapore. It also has an operations center close to Raleigh, North Carolina, and thousands of people work in technology in Poland and India.
Around 74,000 people work at UBS worldwide. With $1.1 trillion in total assets, it has a balance sheet that is approximately twice as big. After absorbing Credit Suisse, the size of UBS’s balance sheet will be comparable to that of Deutsche Bank AG and Goldman Sachs Group Inc.
The chairman of UBS, Mr. Kelleher, stated that it was too early to predict how many jobs will be eliminated. 9,000 job cuts were already planned by Credit Suisse. Centerview Partners provides advice to Credit Suisse. Morgan Stanley and JPMorgan Chase & Co. are UBS’s financial advisors.
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