United banks of Switzerland
UBS’s hasty tie-up with Credit Suisse reverberates through the markets
The union wipes out holders of Credit Suisse’s riskiest bonds
At a press conference in Bern on March 19th the chairmen of Credit Suisse and ubs, the two great rivals of Swiss banking, announced a momentous but unhappy union.
After one weekend of haggling, and years of creeping despair, the merger valued Credit Suisse at around SFr3bn ($3.2bn).
A 167-year-old institution is dead.
Global banking is in a new, turbulent age.
The value of the deal is a 60% discount on Credit Suisse’s stockmarket valuation, and a fraction of its SFr42bn book value.
Shareholders have fared better than owners of the bank’s “additional Tier-1” bonds—a type of debt designed to absorb losses when a bank fails—who were wiped out in a move that is reverberating through bond markets.
The prices of similar debt issued by other banks have plunged.
To get the deal over the line and avoid a market meltdown, the Swiss authorities agreed to provide ubs with SFr9bn of protection from losses it might sustain when disposing of unwanted bits of Credit Suisse, and to extend SFr100bn of liquidity.
Both banks suffered during the global financial crisis of 2007-09; ubs received a bail-out from the Swiss government.
More recently, their paths have diverged.
As bosses at ubs steadied the ship, Credit Suisse sank lower during a series of high-profile mishaps.
Last year the bank lost around SFr7bn, its worst performance since 2008.
In the past three years Credit Suisse’s share price has fallen by 70%; that of ubs has more than doubled.
In October Credit Suisse’s executives failed to convince the market of a plan they had assembled to cut costs and reallocate capital from their investment-banking arm.
For all that, few would have predicted a tie-up even a week ago.
But on March 15th Credit Suisse’s share price plunged by a quarter to its lowest-ever level, seemingly after comments from the chairman of the Saudi National Bank, its largest shareholder, who ruled out any more assistance.
In the early hours of March 16th the Swiss National Bank (snb) attempted to reassure depositors and markets by offering to lend the bank up to SFr50bn.
This should have been enough.
Credit Suisse met the liquidity requirements expected of a systemically important bank.
It had close to SFr100bn of loss-absorbing capital to chew through in the event of a catastrophic run.
But there are no accountants in a foxhole.
A stunning loss of confidence ensued.
By March 17th Credit Suisse’s share price had fallen to barely above its level just before the snb had stepped in.
Depositors were pulling their cash; counterparties feared the worst.
Swiss officials returned with blunt force, pushing for a sale of the bank to ubs.
Integrating the two residents of Zurich’s Paradeplatz will be painful.
ubs plans to make billions of dollars of cuts, hoping that the transaction will have made it money by 2027.
Executing such plans will be especially hard with Swiss regulators keeping close tabs.
ubs’s shareholders will be understandably miffed.
A week ago they owned a reformed, profitable institution.
Now they hold shares in a much riskier proposition.
But there was nobody to listen to their concerns.
Swiss legislators moved quickly to ensure the sale did not have to meet regular shareholder approvals.
The combination of the banks’ wealth-management and Swiss banking operations is one reason for hope.
After the merger, both divisions will be powerhouses.
ubs will probably hold nearly one-third of the Swiss domestic market.
The jewel will remain its wealth-management business, which over the past five years has posted an impressive average return on equity of 24%.
After the merger, the division will have $3.4trn of assets under management and a strong claim on the wallets of the world’s billionaires.
Yet even here it is not all good news.
Previous wealth-management mega-deals have seen clients flee.
Some prefer to park their money with more than one institution—an approach which seems all the more sensible after the past fortnight.
The bloodiest cost-cutting will be in the merged firm’s investment bank, much of it inflicted on traders and dealmakers at Credit Suisse.
A commitment to keep investment banking firmly subservient to wealth management will mean plenty of layoffs.
The offending risky businesses will be moved to a “non-core” unit, and quickly sold.
Only those bankers with the most polished Rolodexes will survive.
Although the bank had already begun down this path, the process will now be much more brutal.
Financial policymakers around the world will be eager for the new institution to succeed.
Turmoil in America and Europe has already given them cause for concern.
On March 19th the Federal Reserve and five other rich-world central banks announced measures to boost dollar liquidity in an effort to ease strains on funding markets.
The combined assets of ubs and Credit Suisse are around twice Swiss gdp.
Regulators will insist on higher capital ratios owing to the new megabank’s importance to the global economy; that will eat into profits.
And the prospect of further trouble is yet more frightening.
After all, this week’s solution—a merger—would be off the table.
The new institution will simply be too big for such a deal.
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