UBS Buys Credit Suisse Rocks Global Finance
On late Sunday (i.e.19th March 2023), the Nation’s Central bank and Financial Regulator announced publicly that Credit Suisse Bank was sound while the Government behind closed doors was secretly preparing a plan to rescue the nation’s second-biggest bank. This news has rocked the global finance.
What is Credit Suisse?
Credit Suisse is a Bank which was established in 1856, to finance the expansion of Swiss Railroads. It was founded by entrepreneur Alfred Escher. According to its Annual Report, Credit Suisse has a headcount of 52,000 employees (at the end of the third quarter of 2022).
Till 19th March 2023 (i.e. Sunday) it was the second-biggest/largest bank by assets after UBS (UBS Group AG is a multinational investment bank and financial services company founded and based in Switzerland).
The Main Business of this bank is to create investment products and manage money for wealthy clients around the world.
What happened to Credit Suisse?
Credit Suisse faced expensive scandals and years of heavy losses. For the Year 2022, Credit Suisse reported a net loss of 7.3 billion Swiss francs compared to a net loss of 1.7 billion francs the year before. The forecast shows that the loss may continue this year and will return to profitability only in 2024. Credit Suisse announced, on Wednesday (i.e. 15th March 2023), that it would exercise an option of borrowing up to 50 billion francs under a covered loan facility & a short-term liquidity facility from the Swiss National Bank.
On 19th March 2023 (i.e. Sunday), Credit Suisse Chairmen Axel Lehmann stated in a press conference that “The acceleration loss of confidence and the escalation over the last few days have made it clear that Credit Suisse can no longer exist in its current form” He also further stated that “We are happy to have found a solution, which I’m convinced will bring lasting stability and security for clients, staff, financial markets and to Switzerland.”
Why UBS is buying it?
On Sunday (i.e. 19th March 2023), the Swiss Federal Department of Finance, the Swiss National Bank and the Financial Market Supervisory Authority (FINMA) intervened and announced that UBS and Credit Suisse have entered the merger agreement, with UBS being the Surviving entity.
UBS agreed to buy Credit Suisse for 3 billion Swiss francs. This merger is in the best interest of clients and other shareholders. This will also help to restore confidence and stability to the financial markets.
On 19th March 2023, in a Press Release Axel P. Lehmann, Chairman of the Board of Directors of Credit Suisse said: “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome. This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.” (Source: Press Release – Credit Suisse and UBS to Merge)
The Central Bank of Switzerland (i.e. Swiss National Bank) Stated that “With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,”
FINMA went on to state that even though the bank would have remained solvent it would have been illiquid, hence, the authorities are required to take action.
What are the Terms of the Deal in the Merger?
The Deal was that UBS will pay Credit Suisse shareholders 3 billion Swiss francs (which is around $3.25 billion). The deal was expected to complete by the end of this year. This will make UBS, a bank, a behemoth worth more than $5 trillion in total invested assets.
According to the deal, the shareholders of Credit Suisse will get one (1) UBS share for every 2.48 shares of common stock. The deal also includes Credit Suisse’s Additional Tier 1 Bonds (AT1 bonds) with an estimated value of $17 billion will be valued at zero. This was decided by the Swiss regulators. Bond Holders will suffer from this move and this has already angered them, as many of them thought they would be protected more than shareholders in the merger/takeover.
The deal also includes support from the Swiss government, FINMA and the Swiss National Bank, with a backed-up default guarantee along with an offer of liquidity of up to 100 billion Swiss Francs (more or less $108 billion). UBS will assume the first 5 billion potential losses, then the Swiss government will offer 9 billion Swiss Francs of potential loss guarantee and the remaining losses will be wiped out by UBS.
Unsolved issues
Unsolved issues are remaining in the merger. What does this mean for investors, clients and employees of Credit Suisse?
Already in its Annual Report Credit Suisse stated that “Credit Suisse expects to run the bank with approximately 43,000 employees (based on full-time equivalents) by the end of 2025 compared to approximately 52,000 at the end of the third quarter of 2022, reflecting natural attrition and targeted headcount reductions.”
After the takeover of Credit Suisse UBS Chairman Kelleher stated in a media conference that it will wind up Credit Suisse’s investment bank – which has thousands of employees worldwide. By doing so UBS expects annual cost savings of some $7bn by 2027.
This merger makes UBS Switzerland’s only global bank. Not only that it is also the sole lender for the Swiss economy.
Conclusion
Whether this rescue of Credit Suisse has calmed the nerves of the Financial world or not is yet to be seen as many questions are still unanswered in the merger.
Confidence in the banking system is slowly coming down across the globe. The reasons for bank failure vary from bank to bank. But, there is one common phenomenon happening across the globe Inflation. To tackle inflation, the central banks of the economies are increasing the interest rates this has hit the value of even safe investments where the bank parks some of their money in. This results in a fall in the share prices of the banks. This becomes a worrying factor not only for the investors but also for shareholders and customers. Hence, the new investments are withheld and customers are also worried about their deposits/ savings in the bank.
