CSGKF - Credit Suisse And UBS Merger: Not Without Consequences

2023-04-18 06:27:18 ET

Summary

• At the end of last month, the Swiss authorities forced UBS to acquire Credit Suisse for a record low of CHF 3 billion.
• This is an unprecedented transaction, given Credit Suisse's size and the record-low amount UBS paid to buy the bank.
• Credit Suisse's bondholders got wiped out, the shareholders would end up with very little compensation.
• The problems are not over, it seems.
• There could be barriers to this transaction.

A lot has happened to the banking sector in the recent several months. The acquisition of Credit Suisse ( CS ) by UBS ( UBS ) was named the "deal of the century". In my view, it is not the deal of the century just because of the two banks' sizes. Also astonishing are the artificially low bid price and the pressure from the financial authorities. Credit Suisse was sold very hastily. Some of the bondholders were wiped out, CS shareholders were left with little compensation, whilst Credit Suisse's clients still face some uncertainty. It seems likely the problems are not over for the global financial system. In this article, I would like to discuss the recent updates to this acquisition and the likely consequences of this deal for the banking sector.

Credit Suisse and UBS acquisition news

Everyone knows that UBS was forced to acquire Credit Suisse by the Swiss financial authorities. Here are more details about it.

UBS is paying CHF 3 billion or $3.25 billion for Credit Suisse, just 60% below the bank's capitalization before the deal was announced. CS stockholders will only get just CHF 0.76 in UBS shares in exchange for stock that used to be worth CHF 1.86 before the takeover announcement. Investors owning "additional tier one" bonds worth $17 billion would lose everything. True, the asset class is very risky. But still it is a very rare situation for such a large bank to wipe their bondholders out.

The most controversial fact is that the deal won't have to be approved by its shareholders. This is because the Swiss government agreed to change the law just before the takeover to remove any uncertainty.

Possible acquisition barriers

It is obvious there were many stakeholders that did not like this unprecedented takeover.

To start with, many employees have to be made redundant right now because many offices would be closed. Credit Suisse's offices all over the world are getting closed, whilst tens of thousands of employees are now looking for job positions.

The AT1 bondholders prepared a lawsuit after it was announced their investment would go down to zero. California-based global litigation firm Quinn Emanuel Urquhart & Sullivan would represent their interests. It is possible for Credit Suisse's shareholders to follow suit.

The Swiss federal prosecutor even decided to investigate the Credit Suisse matter further. It might look strange, given the fact the law was changed to allow such mergers without consulting the stockholders first. But the main concern of the prosecutor seems to be the fact such a merge would create a very large monopoly.

The lower house of the Swiss parliament took the decision to rebuke the rescue of Credit Suisse. This step is largely symbolic because the government's commitment to financial guarantees cannot be overturned. Moreover, the parliament's upper house had voted to accept the takeover plan announced on March 19 by Switzerland's Federal Council, the country's executive authorities, the Swiss National Bank, and the financial markets regulator.

You might argue that the takeover cannot be overturned by the parliament. However, it seems the storm is brewing and various groups were not satisfied with this solution. So, we could see some more news on the acquisition of Credit Suisse.

What was wrong with UBS - Credit Suisse takeover?

The takeover has consequences for Switzerland's reputation, the world's banking system, and the wider economy. Let me explain.

Sure, for years Credit Suisse had been suffering from a series of scandals. 2022 was quite a loss-making year for the bank since the global financial crisis. The fact the bank acknowledged "material weaknesses" in its account keeping and was unable to publish its annual report on time also added to investor concerns. All that was worrying, of course. But on their own these facts did not mean imminent bankruptcy. But the fact Silicon Valley Bank and Signature Bank failed made many investors panic about weaker financial institutions in general. Add to that the soaring interest rates and the general recession fears.

Credit Suisse was sold for almost nothing. According to the last annual report, the bank with a history of 167 years had equity worth around CHF 45 billion. It was, meanwhile, sold for just CHF 3 billion, 15 times less, that is. The deal was very hasty because the Swiss authorities said they were in an "emergency situation" and the bank was on the brink of "bankruptcy". However, the depositors of Credit Suisse did not rush to withdraw cash the way it happened to Silicon Valley Bank. Indeed, the central bank of Saudi Arabia, the main shareholder of CS, only refrained from further investment into the bank but it did not sell its stake. So, it seems there was no need to act so hastily without even consulting its shareholders first.

Before the takeover the SNB granted Credit Suisse an emergency loan of almost $54 billion. According to the SNB, this was not enough to save the bank. However, the decision to merge UBS and Credit Suisse cost the Swiss government much more. President Alain Berset agreed to provide up to CHF 109 billion or $120 billion to support UBS alone to help the bank accommodate CS.

Switzerland's financial reputation

All that is painful for Switzerland's reputation as the world's safe haven for banking clients. No one would have imagined such a hasty bank sale without shareholder approval for so little money happening in Switzerland. In that case, further financial distress is likely. The Swiss authorities seem to believe the new bank will struggle in the near term because they provided almost CHF 260 billion in cash and guarantees. That lack of stability and certainty may lead to further capital outflows. Moreover, the formation of a large monopoly like UBS and Credit Suisse combined is against banking customers' interests. Clients would have fewer choices because there will not be enough healthy competition.

But the very fact one of the pillars of Switzerland's financial system had to be saved from bankruptcy is a concerning sign, indeed. As I have mentioned before, Swiss banks have always had a better reputation than the ones in the EU and the US. If that is happening now, further distress can happen to other large banks that have some "bad" assets or that have been recording some losses. These banks do not have to face serious bankruptcy risks. Remember that Credit Suisse's CET1 ratio was 14%, very reasonable. However, rumors could play a key part here as well. Investors, shareholders, bondholders, and depositors can start withdrawing their money. It would be enough to literally make every single bank go bankrupt.

Earlier on, I wrote an article where I mentioned that even very large and stable banks in the US have high percentages of unsecured deposits. The more unsecured deposits the bank has, the more liquidity problems it is likely to have when some clients start panicking.

If massive bank liquidations happen, a full-scale recession is highly likely. But I wish I am wrong.

Conclusion

The events we are currently facing are similar to the ones happening during the 2008 crisis. The interest rates are rising and the recession risks are high. But the very fact the two largest banks in Switzerland, one of the most popular safe havens for finance, had to merge without any approval from the shareholders and plenty of pressure from the government already makes me think the risks facing the global economy are high.

There is plenty of opposition to this decision from the bondholders, the shareholders, the employees, and even politicians, which still leaves some room for uncertainty. It is likely the takeover will indeed place, given many central banks, including the Fed, the ECB and the Bank of England approved the deal. Still, there are too many stakeholders that oppose the takeover. If AT1 bondholders decided to sue the Swiss government over the acquisition, shareholders might also do the same in the near future to seek compensation. So, I would suggest carefully monitoring the CS-UBS news.

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