Credit Suisse may shortly be a historic footnote. Its capital buffers meant nothing to many depositors. They went on pulling funds even after the Swiss National Bank put up SFr50bn in extra liquidity. UBS is taking the time bomb for the Swiss team. Pray the countdown will stop, stalling this bank run and any others incipient across Europe.
The terms are humiliating to a Credit Suisse management team still talking a couple of days ago about its turnround plan. In its current form, this all-share takeover is worth as little as SFr0.25 a share, roughly SFr900mn ($1bn) in total. Credit Suisse shares closed at SFr1.86 on Friday after weeks of steep declines.
At least no one can complain about banks privatising gains and socialising losses. The Swiss authorities are railroading this transaction through. Shareholders may be robbed of the chance to vote on the transaction. Almost all of the Credit Suisse equity will be wiped out, though its senior creditors should feel comforted.
The rock bottom price gives UBS some protection from unforeseen liabilities, though official deal terms have yet to be announced. There is one escape clause: the deal would be off if UBS credit default spreads rose 100 basis points or more before deal close. That swing seems entirely possible if negotiations drag on into Monday.
This deal, transacted to a conventional timetable in normal financial conditions, would look like a good one for UBS. Global wealth management is a scale game. On paper, UBS has around $4tn in client investment assets and Credit Suisse about $900bn. The latter figure will inevitably be lower in reality. The enlarged UBS would still be “Europe’s champion asset gatherer,” according to one M&A banker.
The nominal takeover price is way below Credit Suisse’s year-end 2022 tangible book value of SFr41.8bn. That would create so-called negative goodwill (“badwill”), according to Autonomous analysts. Despite its name, this is a positive phenomenon. Over time, some or all of that amount could be written up in the combined banks, assuming that markets return to normal.
UBS needs a cushion because some of Credit Suisse’s SFr35.3bn of common tier one capital buffer is questionable. On paper, the two banks have plenty of common tier one capital: over 14 per cent of risk weighted assets.
At last month’s full-year results, Credit Suisse targeted a 13 per cent CET1 ratio (against its risk-weighted assets) by 2025. On current data, that suggests UBS needs a minimum of almost SFr33bn of CET1 capital to cover Credit Suisse. UBS may need to supplant some of what Credit Suisse has.
Restructuring expenses would eat into profits from the combined bank. Credit Suisse’s underlying expense base is about SFr7bn. Integrating Credit Suisse’s 50,000 plus full-time employees will be painful for both sides. Already, 9,000 of Credit Suisse jobs are expected to go. That number could double, causing political headaches in Switzerland.
The new UBS must prepare for a storm of potential litigation too. It is unclear whether the Swiss government is indemnifying the cost of this.
This is a messy, ugly transaction that nobody really wants. It is also necessary. But whether it will halt European bank runs is unknowable. Reassurance is a dangerous game in a financial panic. It can as easily confirm the fears of investors as allay them. Broader action from central banks may still be required.
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