Shares of Credit Suisse and UBS fall after takeover announcement

GENEVA — Shares of Credit Suisse fell 63% in early trading on Monday after announcing that banking giant UBS would buy its troubled rival for nearly $3.25 billion in a deal orchestrated by regulators to prevent further market turmoil in the global banking system. .

Shares of UBS fell 14% in early trading on the Swiss stock exchange.

Swiss authorities have urged UBS to take over its smaller rival after Credit Suisse’s plan to borrow up to 50 billion francs ($54 billion) did not reassure the bank’s investors and customers. Shares in Credit Suisse and other banks fell after the collapse of two US banks raised questions about other potentially shaky global financial institutions.

Credit Suisse is one of 30 financial institutions known as globally systemically important banks, and authorities are concerned about the consequences if it fails.

The deal was “one of the largest for the stability of international finance,” said Swiss President Alain Berset, announcing the deal on Sunday evening. “The uncontrolled collapse of Credit Suisse will have unintended consequences for the country and the international financial system.”

The seven-member Swiss executive, including Berset, passed an emergency ruling allowing the merger to proceed without shareholder approval.

Markets remain volatile despite the best efforts of regulators to restore calm. Global stock markets tumbled on Monday, with Hong Kong’s main index falling more than 3%. Market benchmarks in Frankfurt and Paris opened down more than 1%. Shanghai, Tokyo and Sydney also refused. Wall Street futures fell 1%. Oil prices fell by more than $2 a barrel.

Credit Suisse chairman Axel Lehmann called the UBS sale “a clear turning point.”

“This is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for global financial markets,” Lehmann said, adding that the focus now is on the future and Credit Suisse’s 50,000 employees, 17,000 of whom are based in Switzerland.

Following the news of the Swiss deal, the world’s central banks announced coordinated steps to stabilize banks, including access to a line of credit for banks to borrow US dollars if they needed them, a practice widely used during the 2008 crisis. Three months after the collapse of Lehman Brothers in September 2008, $580 billion worth of such swap lines were activated. Swap lines were also deployed during market turmoil in the early stages of the COVID-19 pandemic.

“Today is one of the most important days in European banking since 2008, with far-reaching implications for the industry,” said Max Georgiou, analyst at Third Bridge. “These developments have the potential to change the course of not only European banking, but the wealth management industry as a whole.”

Colm Kelleher, chairman of UBS, hailed the “huge opportunity” from the takeover and highlighted his bank’s “conservative risk culture” – a subtle blow to Credit Suisse’s reputation for more reckless gambling in search of bigger profits. He said the combined group would create an asset manager with over $5 trillion in total assets invested.

UBS officials said they plan to sell part of Credit Suisse or reduce the size of the bank.

Swiss Finance Minister Karin Keller-Sutter said the board “regrets that a bank that was once a model institution in Switzerland and part of our strong position could even get into this situation.”

The combination of two of the largest and most famous Swiss banks, each with a storied history dating back to the mid-19th century, is a thunderbolt for Switzerland’s reputation as a global financial center, putting it on the cusp of emerging as the nation’s sole banking leader. .

The deal follows the collapse of two major US banks last week, prompting a strong US government response aimed at preventing further panic.

European Central Bank President Christine Lagarde praised the “quick action” of Swiss officials, saying they “helped restore orderly market conditions and ensure financial stability.”

She reiterated that the European banking sector is strong, with strong financial reserves and plenty of cash. Banks “are in a very different position than they were in 2008” during the financial crisis, she said, in part because of tighter government regulation.

The Swiss government is providing more than 100 billion francs to support the takeover.

The deal will redeem about 16 billion francs ($17.3 billion) of Credit Suisse bonds. European banking regulators use a special type of bonds designed to provide a capital reserve to banks in times of crisis. The bonds are meant to be redeemed if the bank’s capital falls below a certain level, and this was prompted by a deal brokered by the government.

This caused market concerns about these bonds and other banks that hold them.

Berset said the Federal Council has been discussing Credit Suisse’s concerns since the beginning of this year and held urgent meetings last week.

Investors and banking industry analysts were still digesting the deal, but at least one analyst suggested the deal could tarnish Switzerland’s global banking image.

“The nationwide reputation for prudent financial management, strong regulatory oversight and, frankly, being somewhat harsh and boring about investments has been erased,” Octavio Marenzi, CEO of consulting firm Opimas LLC, said in an email.

The Financial Stability Board, the international body that oversees the global financial system, named Credit Suisse one of the world’s most important banks, meaning that regulators feared a collapse could affect the entire financial system, as happened to Lehman Brothers 15 years ago.

Parent bank Credit Suisse is not under European Union supervision, but it has branches in several European countries.

Credit Suisse’s troubles resurfaced after it said managers had identified “significant weaknesses” in its internal financial reporting controls. This fanned fears that the next domino would fall. Many of his problems are unique and unlike the weaknesses that led to the collapse of Silicon Valley Bank and Signature Bank. Their failures led to significant rescue efforts by the Federal Deposit Insurance Corporation and the Federal Reserve to avert a crisis like the one that occurred in 2008.

Shares of Credit Suisse fell to a record low on Wednesday after its biggest investor, the National Bank of Saudi Arabia, said it would no longer invest in the bank to avoid violating rules that would come into effect if its stake rose by about 10%.

On Friday, its shares fell 8% to close at 1.86 francs ($2) on the Swiss exchange. The shares have suffered a long decline: in 2007 they traded at over 80 francs.

UBS is bigger, but Credit Suisse still wields significant influence, managing $1.4 trillion in assets. He has significant trading desks around the world, serves the wealthy through his wealth management business, and is a major M&A advisor. The bank survived the 2008 financial crisis unaided, unlike UBS.

Credit Suisse is looking to raise investor money and roll out a new strategy to overcome a host of challenges, including failed hedge fund bets, repeated senior management reshuffles and a UBS spy scandal.