Acquisition of Credit Suisse by UBS: Impact on Investors and Economy

The acquisition of Credit Suisse by UBS has sent shockwaves through the financial world, leaving many investors and economists wondering what the future holds.

On March 19, 2023, the Swiss National Bank (SNB) announced that it would provide UBS with a loan of up to CHF 100 billion to facilitate the acquisition. This significant bailout has sparked concerns about the stability of the Swiss banking system.

The deal is expected to result in a massive restructuring of Credit Suisse, with the goal of creating a stronger and more competitive bank. This will likely involve significant job losses and changes to Credit Suisse's operations and culture.

The acquisition is also expected to have a significant impact on the global financial markets, with many analysts predicting a period of volatility and uncertainty.

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The acquisition process of Credit Suisse by UBS was a complex and fast-paced negotiation that began on 15 March. Swiss authorities were keen to finalize the deal before 20 March to prevent panic in the global financial markets.

The key issues discussed during the negotiations included UBS's reluctance to take on Credit Suisse's unprofitable investment bank and antitrust concerns related to combining the two largest banks in Switzerland. Centerview Partners and JPMorgan advised the management teams of Credit Suisse and UBS respectively.

UBS initially made an offer of 0.25 Swiss francs ($0.27) per share, valuing Credit Suisse at around $1 billion, but this price was met with outrage from Credit Suisse's largest shareholders. The Mideast investors, who owned a quarter of the company, were particularly opposed to the low price.

The Swiss National Bank chairman, Thomas Jordan, led the negotiation and largely excluded Credit Suisse management from the process. UBS eventually increased its offer to 0.50 Swiss francs ($0.55) per share, valuing Credit Suisse at just over $2 billion.

Credit Suisse's board rejected the initial offer, but the bank's largest shareholders offered to invest $5 billion in exchange for a better deal. However, Swiss authorities insisted that Credit Suisse had to sell to UBS.

The final deal was accepted by Credit Suisse's board on the morning of 20 March, with UBS agreeing to purchase Credit Suisse for CHF 3 billion ($3.2 billion). Credit Suisse shareholders received 1 UBS share per 22.48 Credit Suisse shares, equivalent to CHF 0.76 per share.

The acquisition of Credit Suisse by UBS has significant financial implications. UBS faces a capital hit that could reach about $20 billion if the proposed reforms come into effect.

The Swiss Federal Council wants systemically-important banks to hold more capital against their foreign units. This is designed to make the country's banking sector safer and address a weakness that helped accelerate Credit Suisse's demise last year.

UBS executives have spoken out against the need for more capital, calling it the "wrong remedy" to the failure of Credit Suisse.

Between 2008 and 2023, Credit Suisse's investment banking arm underperformed, dragging down the business's profitability and causing significant losses.

The bank suffered from a series of scandals and mismanagement, including losses in its investment arm associated with the collapses of Archegos Capital and Greensill Capital in 2021.

Social media rumors about the bank's demise in October 2022 aided CHF 111 billion in outflows from its wealth management business in the last three months of the year.

Credit Suisse's internal control over financial reporting was flagged by its auditor, PwC, for the period 2020 to 2022.

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AT1 bonds issue is a complex topic, and analysts warned that the UBS-Credit Suisse deal could extend rather than end the banking crisis.

The write-off of AT1 bonds worth CHF 16 billion is a major concern, as it means the banking crisis has started a new chapter rather than reaching its ending.

Russ Mould, investment director at AJ Bell, said that the terms of these bonds are unusual, allowing for total write-off instead of conversion to equity.

Most AT1 bonds have more protections, but Credit Suisse and UBS's AT1 bonds do not.

The Bank of England and European authorities stated that equity would remain subordinated to debt, which means AT1 holders will be exposed to losses after equity investors.

This decision has been met with criticism, with former European Central Bank vice president Vítor Constâncio calling it a "mistake with consequences" that may lead to court cases.

The AT1 bonds traded for a few cents on the dollar, implying that investors still see value in them through litigation.

Swiss financial regulator FINMA, however, stated that the write down complied with contractual obligations.

These bonds provide that they will be completely written down in a "Viability Event", such as if extraordinary government support is granted.

Interestingly, Credit Suisse's $2.5 billion in Tier 2 bonds were not written off, despite having similar terms to its AT1 bonds.

The sale price issue is a contentious topic in the Credit Suisse takeover. Shareholders claim the bank should have been sold at a much higher price, citing a value of between CHF7.3 billion to CHF35 billion.

The value of individual Credit Suisse shares plummeted from CHF1.86 on March 17 to CHF0.76 just two days later. This drastic drop in value is a major point of contention for shareholders.

The Swiss Federal Council wants systemically-important banks to hold more capital against their foreign units to protect against future risks.

UBS faces a potential capital hit of about $20 billion if the reforms come into effect.

The proposals aim to make the country's banking sector safer and address a weakness that contributed to Credit Suisse's demise last year.

UBS executives have spoken out against the need for more capital, with Chairman Colm Kelleher calling the proposal the "wrong remedy" to the failure of Credit Suisse.

UBS's CET1 ratio, a measure of capital strength, was 14.8% at the end of the quarter.