20th Mar 2023 10:26
(Alliance News) - Following frantic weekend negotiations, beleaguered lender Credit Suisse Group AG has been taken over by its local rival UBS Group AG, saving the bank from total collapse but failing to quell market concerns.
UBS will take over its Swiss rival Credit Suisse for USD3.25 billion following crunch talks on Sunday aimed at stopping the stricken bank from triggering a wider international banking crisis.
The Swiss government said the deal, involving Switzerland's biggest bank taking over the second-largest, was vital to prevent irreparable economic turmoil spreading throughout the country and beyond.
Shares in UBS were 7.2% lower in Zurich on Monday morning. The bank has a market capitalisation of CHF53.17 billion. Meanwhile, shares in Credit Suisse plunged 61% for a market cap of just CHF2.78 billion, about USD2.99 billion.
Andrew Kenningham, chief Europe economist at Capital Economics, said the deal could draw a "permanent line" under the Swiss banking sector's problems.
"However," he added, "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."
Kenningham noted some specific concerns for the marriage between UBS and Credit Suisse.
First, he noted that as part of the transaction, Credit Suisse's Additional-Tier 1 bonds have been fully written off. Kenningham said this is "controversial" given that the common equity – which is typically considered junior to AT1 in the capital structure – was not entirely wiped out.
"That decision could result in a re-pricing of AT1 and other bail-in bonds of other banks – indeed it appears that the prices of other banks' AT1 instruments have fallen in early trading this morning," he explained.
Russ Mould, investment director at AJ Bell, said that this means banking crisis seen over the past few weeks has "started a new chapter rather than reaching its ending."
Second, Kenningham said there could be legal challenges to the agreement, prolonging the process and creating further uncertainty.
Finally, he said further substantial losses in the legacy bank "cannot be ruled out", adding this could affect confidence in the enlarged UBS and/or prompt demands for further state support.
"So while the deal may yet prove to be a turning point in the current banking crisis, we will probably not know for certain for a while yet," Kenningham concluded.
For Gary Greenwood at Shore Capital, the FINMA brokered takeover of Credit Suisse has avoided a "more cataclysmic event": the collapse of the bank altogether. This, he said, was good news in isolation, but noted that the associated write-down of the AT1 bonds was "clearly not pleasant", though not "totally unsurprising" from a "high-level viewpoint".
"It has clearly spooked the markets, and will no doubt push up the cost of AT1 issuance in the near-term and so raise the overall cost of capital for banks for the time being, noting that such instruments are commonplace in the capital stacks of all the major and also some smaller banks."
London-listed banks slid into the red on Monday morning amid a wider global sell-off. HSBC was down 3.1%, NatWest fell 2.3%, Barclays lost 4.2%, Lloyds dropped 1.6%, and Standard Chartered was trading 3.5% lower.
However, according to Greenwood, UK banks could not be in a stronger position to withstand the current economic downturn.
"Following more than a decade of regulatory tightening, [UK banks'] balance sheets are in excellent shape with strong capital, funding and liquidity, and asset bases that are now much lower risk. As such, we do not believe the UK banking systems or any of the major UK banks are in imminent danger of collapse. However, we do believe that share prices are likely to remain sentiment driven and so volatile in the near-term, and we would therefore encourage long-term investors to take advantage of the excellent buying opportunity in the UK banking sector that this has created."
By Heather Rydings, Alliance News senior economics reporter
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