Ubs To Buy Credit Suisse – $3.2 billion in historic deal
Union Bank of Switzerland successfully struck a deal, brokered by the Switzerland government to buy its rival bank Credit Suisse for over $3 billion.
The deal aimed at containing the financial crisis brought about by the collapse of two U.S. banks last week.
The Swiss national bank in a statement said, “With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation”.
The shares of Credit Suisse dropped to a great extent in the last few weeks, and trade was at pause after the share price fell to as low as 21%. The shareholders of Credit Suisse have been at the receiving end of a great loss.
They would be receiving the equivalent of just 0.76 Swiss francs in UBS shares for stock that was at 1.86 Swiss francs a few days ago, while owners of ‘additional tier one’ bonds will lose everything.
Any grievances from the shareholders will not be entertained since the Swiss government has agreed to change the law to remove any uncertainty about the emergency rescue deal.
The bank stated that it had found ‘material weaknesses’ in its reporting processes of the financial years 2021 and 2022. Responding to that, its biggest backer Saudi National Bank said it would discontinue buying shares in Credit Suisse.
The collapse of two major banks of the U.S, Silicon valley bank and Signature bank brought uncertainties about the vulnerable spots in the banking systems all over the world.
But the downfall of Swiss is not directly led by Silicon valley bank and Signature bank, but by its own failure. The bank ended the financial year 2022 with a loss of approximately $8 billion.
An amount as high as $54 billion couldn’t help the Suisse and the deal seemed to be the last resort.
“This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.” Said Credit Suisse chairman Axel Lehmann.
FINMA– The Swiss Financial Market Supervisory Authority pointed out the possibility that Credit Suisse could have become “illiquid, even if it remained solvent and it was necessary for the authorities to take action”.
To support UBS to take over Credit Suisse, the federal government is offering a loss guarantee of 9 billion francs, equivalent to $9.7 billion for specified portfolio. Activation of the same will take place if losses are actually incurred on the portfolio.
If they are, UBS would assume the first 5 billion francs, equivalent to $5.4 billion, the government the next 9 billion francs.
Both UBS and Credit Suisse are among the top thirty global systemically important banks. The 166 years old lender, Credit Suisse formerly Schweizerische Kreditanstalt was founded by Alfred Escher in the year 1856.
When Switzerland needed to finance the rail network expansion and undergo industrialization, Kreditanstalt was founded. Ever since then, it turned into an integrated bank operating in more than 50 countries around the world.
UBS has extensive roots as the merger of several banks in 1912. It absorbed a number of other Swiss banks and emerged as one of the largest commercial banks of the country with many offices beyond Switzerland’s borders.
It built a reputation of being the world’s largest wealth manager, which still continues to cater to individuals with a very high net worth, globally.
Over the past years the fortunes of the two banks have been on divergent paths. UBS earned $7.6 billion in profit in 2022 while Credit Suisse lost $7.9billion. For credit Suisse, shares went down 74% from the last year while they remained in favor of UBS.
WHAT LIES AHEAD?
The historic takeover will strengthen and reinforce the position of UBS as the world’s biggest wealth manager with an asset investment of $5 trillion. Additionally, it will fuel UBS’ intention to spread its wings in Asia and America.
The decision of UBS to take over credit Suisse has been appreciated by financial market regulators across the globe.
The United States authorities said that they were supportive of the action and worked in close proximity with the Swiss central bank.
US Treasury secretary Janet Yellen and Federal Reserve chair Jerome Powell in a joint statement said, “We welcome the announcements by the Swiss authorities today to support financial stability”.
Support was seen coming from Europe as they stated that the European Central Bank would be willing to fund the operations as and when the need be.
“We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation” said the Bank of England as it welcomed the move.