UBS takeover of Credit Suisse and Swiss government's 100-billion franc backstop should contain the chaos

Colm Kelleher, chairman of UBS Group AG (left) Karin Keller-Sutter, Switzerland's finance minister (center) and Alain Berset, Switzerland's president, following a news conference in Bern, Switzerland, on Sunday, March 19, 2023. UBS agreed to buy Credit Suisse in a historic, government-brokered deal aimed at containing a crisis of confidence that threatened to spread across global financial markets. (Source: Bloomberg)

Once the world knows a bank is in government-led talks about a rescue deal, then it’s a deal that has to be done. Credit Suisse Group AG could not afford to go into the opening of Asian markets with its own national authorities having questioned its viability.

The Swiss government said it had to act after heavy deposit outflows late last week. The Swiss National Bank’s $54 billion liquidity support handed to Credit Suisse on Wednesday didn’t restore faith. Opening on Monday without a solution in place would have very likely meant a death spiral for Credit Suisse and mayhem for markets.

UBS Group AG is the reluctant rescuer even at a bargain price of roughly $3.25 billion, paid in UBS shares. Credit Suisse’s last reported tangible equity value was about $45 billion. UBS is picking up its local rival for just 7 percent of what it should be worth -- and little more than double what Saudi National Bank paid for just a 9.9 percent stake late last year. In addition, $17 billion of junior debt designed to be written down in a banking failure is being wiped out completely. Plus, Switzerland is giving UBS a near-$10 billion guarantee over losses on certain assets, after UBS has taken an initial $5.4 billion of losses.

As the government-preferred buyer, UBS had a strong hand and drove a very hard deal. The cost to Credit Suisse stock and junior bondholders and to the Swiss government covers a lot of potential asset losses. Even at such a price, the deal is not without risks for UBS: The cost of insuring its bonds against default jumped on news of the takeover. When JPMorgan Chase & Co. took over Bear Stearns for just $2 per share in 2008 and with a similar but larger government guarantee on certain asset losses, it still ended up regretting the trade.

UBS didn’t want the management distraction or the risks and responsibilities that come from such a massive takeover. The bank had its own brush with death during the 2008 crisis and swiftly ditched much of its investment bank, especially those parts that traded debt.

Based on accounts from the end of 2022, the deal increases UBS’s total assets by 52 percent to about 1.6 trillion francs ($1.7 trillion), but it increases risk-weighted assets by 78 percent to 570 billion francs. Risk-weighted assets is the measure used to assess a bank’s capital needs. Credit Suisse doesn’t have a ton of bad assets, but they are riskier.

UBS Chairman Colm Kelleher told reporters that it would cut Credit Suisse’s investment bank significantly. The bits that UBS will keep will leave the enlarged group’s investment bank and trading desks needing no more than 25 percent of its capital.

That sounds like it could be brutal. Credit Suisse’s last reported RWA for its investment bank was only 32 percent of its total RWA. Add this to UBS, and the combined group would have just over 30 percent of its capital in investment banking. However, UBS might also view a lot of the capital Credit Suisse carries for operational risks as being attached to its investment bank. It also wants to rapidly slash Credit Suisse’s 30 billion francs of non-core assets.

The faster UBS looks to sell assets out of Credit Suisse’s investment bank, the greater the losses it would have to take. UBS is protected by having wiped out most of Credit Suisse’s equity and all its junior bonds, along with the government guarantee. But it will still be a tricky job with some tough choices and UBS might end up holding on to some of this business longer than it wants. The outlook for the revival of a separated First Boston brand meant to be led by dealmaker Michael Klein doesn’t look great, to say the least.

What Kelleher is happy to take on is the global wealth management business. And he’s determined to keep the domestic Swiss bank. The combined businesses could still lose some rich clients: Anyone still a client of both banks will likely want to diversify some of their assets to another institution. Acquiring the domestic Swiss bank will significantly increase the market share of the combined group and it could lose clients there too.

Despite the risks, UBS is getting a bank that was not finally brought down by bad assets but by a wave of liquidity fears rolling around the world. Credit Suisse was vulnerable because its shares had been battered by concerns about its long-term profitability and a prolonged period of uncertainty about its strategy had led to a loss of bankers and business. It was not laid low by fears about bad assets, which was what killed long-lived brokers like Bear Stearns and Lehman Brothers 15 years ago.

The Swiss government added a 100 billion-franc liquidity backstop to the takeover agreement, which protects UBS from further deposit flight while markets are still fragile. The whole deal was welcomed by the central banks of the US, UK and Europe as well – each fretting about the potential for further fallout from a Credit Suisse collapse. A coordinated program to supply dollars to the global financial system was also announced on Sunday.

There are lots of details still to be revealed and questions will yet be asked – for example bondholders will be aghast to be wiped out when shareholders are getting paid at least something. But the bigger dangers of letting Credit Suisse suffer an accelerating run were clear: This takeover ought to contain the chaos.

Paul J Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times. Views are personal, and do not represent the stand of this publication.

Credit: Bloomberg