UBS Group AG shares slumped Monday as investors digested the news of its historic acquisition of rival Credit Suisse Group AG and began to assess the job of integrating the troubled Swiss lender.
(Bloomberg) — UBS Group AG shares slumped Monday as investors digested the news of its historic acquisition of rival Credit Suisse Group AG and began to assess the job of integrating the troubled Swiss lender.
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 wipeout of holders of certain riskier Credit Suisse bonds in the deal and the uncertainties pegged to the new, much-larger Swiss bank have increased immediate nervousness in the sector. Under Chief Executive Ralph Hamers, UBS must now divert from its original growth strategy and 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 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.”
UBS shares fell as much as 16% before paring declines to 9.7% at 10:25 a.m. in Zurich. The rout spread to other banks, with the Stoxx 600 Banks Index falling 3.5%.
Uncertainties Ahead
Hallett at KBW listed the 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.
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.
“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.
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.
“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.”
(Updates with details throughout.)
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