This morning, it was announced that Swiss giant UBS has agreed to buy rival Credit Suisse in a deal worth $3.25 billion.
The news came after a weekend of negotiations, aimed at safeguarding the country’s banking system and attempting to prevent a crisis spreading across global markets.
UBS will pay about SFr0.76 a share in its own stock, up from a bid of SFr0.25 earlier on Sunday (worth about $1 billion) which was rejected by the Credit Suisse board. However, the offer remains far below Credit Suisse’s closing price of SFr1.86 on Friday.
Despite a SFr50 billion ($54 billion) credit line provided by the Swiss National Bank last Wednesday, Credit Suisse’s shares continued to fall amid market turmoil surrounding the collapses of Silicon Valley Bank, Signature Bank, and Silvergate Bank earlier this month.
The Swiss National Bank has also committed to SFr100 billion in liquidity assistance for the merger.
Finma, Switzerland’s regulator, said there was a risk that Credit Suisse could have become “illiquid, even if it remained solvent, and it was necessary for the authorities to take action”.
What caused the problems at Credit Suisse?
Credit Suisse is no stranger to controversies. Switzerland’s second-largest bank has been hit by years of scandals, allegations and fines, which have gradually eroded investor confidence.
In 2019, Credit Suisse were embroiled in a corporate espionage scandal, which involved the company hiring private investigators to surveil some of its own executives. The resulting Finma investigation ultimately led to the exit of the company’s CEO, Tidjane Thiam.
Then, in 2021, Greensill Capital collapsed. Greensill was a UK-based financial firm specialising in short-term corporate loans. Their collapse threw Credit Suisse into difficulty, as they were heavily invested in the firm. In March 2021, after Greensill declared insolvency, Credit Suisse closed four connected funds in which around $10 billion had been invested.
Just four weeks after the Greensill collapse, Credit Suisse was rocked by the implosion of US hedge fund Archegos, which cost the bank more than $5 billion.
Later, in October 2021, the bank was fined $475 million by US and British authorities after it was found to have been involved in a bribery scandal in Mozambique involving loans to state-owned companies.
To help stem the flow of scandals, former Lloyds Banking Group chief Antonio Horta-Osorio was brought in as Credit Suisse chairman in April 2021. Despite pledging to put better risk management at the heart of its culture, he resigned less than nine months later after it emerged he had violated Switzerland’s Covid quarantine rules.
The misconduct charges continued in June 2022, with Credit Suisse being issued with a $2 million fine in a money laundering case linked to a Bulgarian cocaine network.
In October 2022, Credit Suisse said it would pay $495 million to settle a row with the US state of New Jersey over mortgage-backed securities dating back to the 2008 financial crisis.
To start this year’s controversies, Credit Suisse was forced to postpone its annual report, which had been scheduled to be published last week, after a last-minute call from the US Securities and Exchange Commission over revisions made to cash-flow statements for 2019 and 2020. When it finally released the report last Tuesday (14th March 2023), it acknowledged “material weaknesses” in its internal controls.
Which brings us to today. Last Wednesday, the bank’s largest shareholder Saudi National Bank announced it had no interest in increasing its 9.9% stake, compounding fears over the safety of depositors’ cash caused by the US banking collapse. Deposit outflows from Credit Suisse late last week topped SFr10 billion a day, necessitating a SFr50 billion loan from the Swiss National Bank.
Unsurprisingly, the company’s share price has plummeted, falling almost 75% over the last year:
What’s the market impact?
UBS shares are currently down over 4% today, as investors begin to assess the integration amid considerable uncertainty around the newly formed Swiss bank. UBS is now likely to deviate from its original growth strategy, shifting its focus to deal-related tasks, including winding down the Credit Suisse Investment bank and cutting jobs over the next several years.
Bank shares and stock markets fell in Europe, with the UK market falling almost 2%, before paring losses and recovering to flat for the day as at time of writing. Shares in HSBC, Barclays, Standard Chartered, Lloyds Banking Group, and NatWest all dropped by between 4 and 7% at the open this morning.