UBS Group AG shares slumped Monday as investors weighed the pitfalls of its historic acquisition of rival Credit Suisse Group AG, an undertaking that puts at risk the almost three-fold gain in the bigger bank’s share price since 2020.
(Bloomberg) — UBS Group AG shares slumped Monday as investors weighed the pitfalls of its historic acquisition of rival Credit Suisse Group AG, an undertaking that puts at risk the almost three-fold gain in the bigger bank’s share price since 2020.
The government-brokered, 3 billion Swiss franc ($3.2 billion) deal signed late Sunday was intended to put an end to a crisis of confidence at Credit Suisse and stem contagion through the global financial system that started with the collapse of Silicon Valley Bank earlier this month.
Yet the deal potentially undermines UBS Chief Executive Officer Ralph Hamers’ successful pitch to investors since he arrived: that UBS was drama-free, profitable, and returning money to shareholders. Now, the firm’s buyback plans are on pause and it has to embark on a multi-year integration and restructuring. Shareholders are weighing whether the payoff will be worth it.
“UBS has traditionally operated a high returning, high quality, stable franchise,” analysts including Tom Hallett at Keefe, Bruyette & Woods wrote in a note Monday. “The acquisition of Credit Suisse throws much of this into question.”
From making a predictable profit of between $4 billion and $8 billion every year for the past five years, UBS must now focus on complex tasks like winding down Credit Suisse’s investment bank and shedding an as-yet-unknown number of jobs over the next several years.
UBS shares fell as much as 16% before paring declines to 4.4% at 11:56 a.m. in Zurich. The rout spread to other banks, with the Stoxx 600 Banks Index falling 1.9%. The cost of insuring UBS’s debt against default soared on Monday. The UBS Group one-year credit-default swap rose 50 basis points to 149 basis points on Monday, on course to become the biggest increase on record.
Uncertainties Ahead
Hallett at KBW listed further uncertainties that UBS now faces, ranging from the implementation of new, higher capital requirements due to the bigger size, to the future of share buybacks, the use of Swiss National Bank liquidity lines, and the pace of deleveraging at the investment bank.
UBS had planned to repurchase more than $5 billion of shares this year.
At the same time, the knock-down price tag for Credit Suisse and the presence of government guarantees means there could be significant upside for UBS once the initial fog lifts. The combination of the two banks creates a wealth-management giant with some $5 trillion in invested assets.
“I think UBS is getting a terrific prize here and the market will soon realize that,” said Jerry Del Missier, Chief Investment Officer of Copper Street Capital, in an interview with Bloomberg Television. “The derisking of the investment bank had already begun and was well underway.”
The Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for potential losses from assets UBS is taking over. Regulator Finma said about 16 billion francs of Credit Suisse bonds, known as AT1s, will become worthless to ensure private investors help shoulder the costs.
That step represents something of a special case in Europe. A total write-down of additional tier 1 bonds is not the norm, with risky bonds at most other banks in Europe and the UK having more protections, according to Bloomberg Intelligence.
Read More: Credit Suisse’s AT1 Bond Wipeout Seen as an Exception in Europe
The European Banking Authority weighed in on Monday, saying in a statement that “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down.”
The plan, negotiated in hastily arranged crisis talks over the weekend, seeks to address client outflows and a massive rout in Credit Suisse’s stock and bonds over the past week following the collapse of smaller US lenders. A liquidity backstop by the Swiss central bank mid-week failed to end a market drama that threatened to send counterparties fleeing, with potential ramifications for the broader industry.
The fusion is an historic event for the nation and global finance. UBS traces its roots back through some 370 separate institutions over 160 years, culminating in the merger of the Union Bank of Switzerland and the Swiss Bank Corporation in 1998. After emerging from a state bailout during the 2008 financial crisis, UBS built a reputation as one of the world’s largest wealth managers, catering to high- and ultra-high net worth individuals globally.
“It’s positive news that a deal could be found as there were not many alternatives, and a nationalization or unwinding of Credit Suisse would likely have increased sector risks,” said analysts including Flora Bocahut at Jefferies said. “However, UBS embarks on significant execution risk.”
–With assistance from Luca Casiraghi and Marion Halftermeyer.
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