UBS to acquire Credit Suisse for over $3 billion in historic deal

Under pressure from regulators seeking to prevent a potentially catastrophic loss of confidence in the global banking industry, UBS Group AG has announced its acquisition of Credit Suisse Group AG for a sum exceeding $3 billion. This marks the largest banking deal in recent years, as UBS takes over its long-time rival.

This transaction between two major players in Swiss finance represents the first megamerger of systemically significant global banks since the 2008 financial crisis. In the aftermath of that crisis, regulators intervened in the banking landscape to carve up institutions and match them with rivals, often forcing the issue.

To help mitigate the potential losses incurred by UBS as a result of acquiring Credit Suisse, the Swiss government has pledged over $9 billion in backing. Additionally, the Swiss National Bank has provided more than $100 billion in liquidity to UBS to aid in the completion of the deal.

Under pressure to complete the deal before Asian markets opened for the week, Swiss authorities were faced with a delicate balancing act. They needed to secure agreement from both banks' boards while avoiding the alternative: a regulator-led winddown of Credit Suisse, which could have proved more cumbersome and damaging to the financial system.

Regulators were spurred into action by the increasingly bleak prospects for Credit Suisse, which is said to have experienced outflows of up to $10 billion per day last week, according to The Wall Street Journal. 

In addition to concerns about the potential impact of Credit Suisse's collapse on global stability, regulators feared that Switzerland could become a new source of contagion. Following the UBS deal, a consortium of central banks - including the Federal Reserve and the Swiss National Bank - announced an expanded dollar swap line. This type of international lending operation was described as "an important liquidity backstop to ease strains in global funding markets."

According to Credit Suisse Chairman Axel Lehmann, the bank was unable to withstand the recent difficulties that began in the United States. "The acceleration of the loss of trust and the worsening of the last few days made it clear that Credit Suisse cannot continue to exist in its current form," he stated, as per The Wall Street Journal’s report. 

UBS Chairman Colm Kelleher has said that UBS intends to reduce the size of Credit Suisse's investment banking business and align it with UBS's more conservative risk culture. He also emphasised that the deal would "promote financial stability in Switzerland and generate considerable sustainable value for UBS shareholders." In order to accommodate the acquisition, however, UBS has announced that it will temporarily suspend its stock buyback program.

The recent abrupt collapse of Silicon Valley Bank has spurred investors worldwide to search for vulnerabilities in the financial system. Credit Suisse, which had already been identified as a troubled institution due to several self-inflicted scandals and trading losses, was at the top of many of these lists. Most notably, the bank suffered losses as a result of the failures of two key clients in 2021: Greensill Capital and Archegos Capital Management.

Despite a series of executive changes and promises to improve, investors felt that Credit Suisse's missteps continued unabated. The bank's new management, many of whom previously worked at UBS and assumed their positions last year, sought to reassure customers and implement a restructuring plan to reverse the bank's fortunes.

Last fall, Credit Suisse raised $4 billion in new equity from investors such as Saudi National Bank to support an extensive restructuring effort. However, in the final months of 2022, customers were leaving the bank en masse, taking with them $120 billion in assets under management.

As Credit Suisse's stock price and bonds plummeted, the bank received a lifeline of $54 billion from the Swiss National Bank last Thursday. On Sunday, Switzerland's finance minister stated that the liquidity line was increased twofold later that same day to guarantee the bank's survival until the weekend.

However, Swiss officials, as well as regulators in the US, UK, and the European Union who oversee aspects of the bank, were worried that the bank could become insolvent this week if left unchecked, and they were afraid that the eroding confidence could spread to other banks.

According to Finma, the financial regulator of Switzerland, Credit Suisse underwent a "confidence crisis" and there was a possibility of the bank facing a liquidity crisis even if it remained solvent. To prevent significant damage to the global and Swiss financial markets, it was imperative for the authorities to intervene.

Finma confirmed that both banks would operate normally without any restrictions or interruptions on Monday following the discussions between regulators and the two banks, which began on Wednesday. Regulators presented two options: a takeover or bankruptcy. A bankruptcy would be a long and complicated process, and there were concerns among UBS executives that it would negatively impact the reputation of Swiss banking. This led to more urgent discussions with Swiss authorities about a possible deal.

UBS had never desired a forced merger with Credit Suisse, which had a long list of scandals and issues. Credit Suisse's large investment bank was the antithesis of the "capital-light" strategy that UBS had been implementing for years, which centred on earning fees by managing the finances of wealthy clients.

However, there were some appealing aspects to Credit Suisse. For instance, it is UBS's main competitor in the Swiss banking system. Under normal circumstances, a merger of the two would have seemed like a monopolistic combination. Nevertheless, UBS was granted a waiver by the Swiss authorities. Additionally, Credit Suisse has a pool of affluent wealth-management customers in Asia, which complements UBS's comparable business and goals in the region.

The problematic area for Credit Suisse is its investment bank. The bank had been gradually reducing significant portions of its operations and intended to separate its advisory business into a new entity headed by a former board member, Michael Klein.

The people familiar with the matter stated that the Swiss government has agreed to share in parts of the losses that UBS may face in winding down the remaining parts of Credit Suisse's advisory business, though the spinoff is now uncertain.

According to WSJ, a final attempt was made on Sunday to save Credit Suisse by a group that included the bank's largest shareholder, the Saudi National Bank. The group proposed injecting about $5 billion into the bank as an alternative solution. The plan would have fully protected Credit Suisse bondholders.

The offer was rejected outright by Swiss ministers. The shareholders had demanded the same government support being offered to UBS but were turned down. However, the agitation by the shareholders did lead to an increase in UBS's proposal to pay 3 billion Swiss francs, equivalent to about $3.3 billion, in UBS shares, up from an earlier proposal of 1 billion Swiss francs. Nevertheless, this amount is still less than half of Credit Suisse's last traded market value on Friday.

UBS will also share the losses of $17 billion in Credit Suisse's "additional tier 1" bonds, which appear as bank bonds until the bank runs into financial difficulties, resulting in the bonds becoming valueless. Removing the AT1 bonds substantially reduces the amount of debt that UBS will take on. If the bonds were not eliminated, the deal would not have been profitable for UBS shareholders, according to WSJ’s insiders.

The end of Credit Suisse after nearly 167 years is a momentous event in the banking industry since the last financial crisis. It also signifies a new level of global impact resulting from the banking crisis that began with the sudden collapse of Silicon Valley Bank earlier this month. While Silicon Valley Bank's business was limited to a specific geographic area and industry, Credit Suisse is a global player, despite its recent efforts to streamline operations and limit riskier activities like lending to hedge funds.

At the close of 2022, Credit Suisse had a balance sheet of around $500 billion and a workforce of about 50,000 employees, over 16,000 of which were based in Switzerland. Its investment banking divisions were located in cities such as New York, London, and Singapore. Additionally, it had an operational hub near Raleigh, N.C. and employed several thousand individuals in technology roles across India and Poland.

UBS has a global workforce of approximately 74,000 employees and a balance sheet with total assets of $1.1 trillion, which is roughly twice the size of Credit Suisse's balance sheet. 

Following the acquisition, UBS's balance sheet will be on par with those of Goldman Sachs Group Inc. and Deutsche Bank AG. The number of job cuts resulting from the merger is not yet determined, according to Kelleher, the UBS chairman, but Credit Suisse had already planned to eliminate 9,000 jobs. 

Centerview Partners is advising Credit Suisse, while JPMorgan Chase & Co. and Morgan Stanley are financial advisers for UBS.