The San Juan Daily Star
UBS agrees to buy rival Credit Suisse
By Michael J. De La Merced, Maureen Farrell and Andrew Ross Sorkin
Switzerland’s largest bank, UBS, agreed over the weekend to buy its beleaguered and longtime rival Credit Suisse for about $3.2 billion, the most drastic bid yet to arrest the financial panic that has swept the globe over the past week.
The deal, hastily brokered over the course of a few days by the Swiss government, signifies the stunning fall of a 166-year-old institution that was once an emblem of Swiss pride. It is perhaps the most sweeping shake-up of the global banking sector since the 2008 financial crisis, when onetime financial giants were acquired by rivals to avoid catastrophic meltdowns.
Created in 1856 to finance Switzerland’s rail network, Credit Suisse ascended to the top echelons of finance, at times standing toe to toe with American titans such as JPMorgan Chase.
But the bank, which is based in Zurich, was also tarred by decades of scandals, management upheavals and failed attempts at reform that damaged its reputation, attracted lawsuits and left it reeling from losses. The recent rout in banking stocks, spurred by the collapse of Silicon Valley Bank this month, brought its long-standing vulnerabilities into sharp relief and hastened its demise — highlighting just how panicked investors are.
“This is a historic day in Switzerland, but frankly, a day we hoped would not come,” Colm Kelleher, UBS’ chair, told analysts on Sunday.
Swiss government leaders and regulators said Sunday that the deal was the most effective way of reassuring investors about the health of the country’s financial sector and the possibility of its troubles spilling across its borders.
UBS’ takeover of Credit Suisse “has laid the foundation for greater stability both in Switzerland and internationally,” Karin Keller-Sutter, a member of the Swiss Federal Council, said at a news conference.
“We welcome the announcements by the Swiss authorities today to support financial stability,” U.S. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell said in a joint statement.
Under the terms of the deal, UBS will pay 0.76 of one of its shares for each share of Credit Suisse, valuing it at about 3 billion Swiss francs, or $3.2 billion — a small fraction of its market value as of Friday.
To provide financial support to UBS to carry out the deal, Swiss National Bank agreed to lend up to 100 billion Swiss francs. And Finma, the Swiss financial regulator, undertook several extraordinary steps to help UBS quickly digest its chief competitor, including wiping out $17 billion worth of Credit Suisse’s bonds and eliminating the need for UBS shareholders to vote on the deal.
So hastily assembled was the deal that UBS told analysts that they had not had time to fully model all of the financial impacts of buying Credit Suisse.
As Credit Suisse’s stock and bonds faltered over the past week, analysts and investors increasingly speculated that the Swiss government would force the firm to merge with UBS to avoid chaos. Indeed, several times Sunday, UBS executives emphasized that the negotiations had been initiated by Swiss regulators.
In the past week, as depositors withdrew billions of dollars of their money, and other financial institutions unwound deals with the bank, it became apparent to regulators that Credit Suisse might not be able to open for business absent a takeover by the government or UBS, one person familiar with the negotiations said.
Until the last minute, both sides were unsure that they would be able to pull off a deal because they were far apart on its terms. On Saturday night, UBS offered to buy Credit Suisse for roughly $1 billion, but the bank’s board rebuffed that proposal, according to the person familiar with the negotiations. Credit Suisse had argued that its real estate holdings alone were worth around that amount, another person familiar with the negotiations said.
Still, UBS was the only viable suitor, as the Swiss government was prepared to offer special protective terms only to a Swiss institution, according to one of the people familiar with the deal.
Credit Suisse had been struggling to turn itself around in recent months, but two events last week contributed to its downfall. The bank disclosed Tuesday that there were “material weaknesses” in its financial reporting. And it was swept up in the broad and intensifying panic around the health of banks. As shares in lenders worldwide tumbled after the collapse of Silicon Valley Bank and Signature Bank, markets grew especially wary of Credit Suisse.
Prices for Credit Suisse shares and bonds dropped sharply all week, as did the cost of insuring its debt against default, despite efforts by Swiss regulators to shore up investor confidence. On Thursday, Credit Suisse said it would tap a $54 billion lifeline from the Swiss central bank in hopes of staving off a disaster. And yet by Wednesday, the Swiss government had reached out to UBS, asking the bank to consider buying Credit Suisse.
Credit Suisse had been several months into an ambitious turnaround effort meant to shrink the firm, including by spinning out much of its investment bank and cutting thousands of jobs and other costs.
As part of the deal, UBS will essentially wind down Credit Suisse’s investment bank, with the combined firm’s operations in that area set to eventually account for no more than one-quarter of its assets.
The disassembling of Credit Suisse is the latest consequence of Silicon Valley Bank’s collapse. Despite being a relatively midsize lender that operated mostly in the United States, SVB’s swift fall reawakened in investors and depositors a fear of potential risks lurking at other institutions, particularly as central banks raise rates to combat rising inflation.
Shares in banking stocks around the world fell sharply last week, wiping out nearly a half-trillion dollars in market value. Regulators and major lenders have taken extraordinary steps to avert greater catastrophe, including the largest U.S. banks’ leading a $30 billion rescue of the midsize First Republic Bank.
By the time Credit Suisse announced its turnaround initiative in October, investors and analysts were skeptical that — even under a new CEO, its third in three years, and with $4 billion in new capital led by state-owned Saudi National Bank — the bank could succeed.
But a prolonged drip of bad news followed, including the revelation that Credit Suisse had lost $147 billion worth of customer deposits in the last three months of 2022.
Then the collapse of Silicon Valley Bank, 5,800 miles away, set off a shock wave in the global banking sector.
Further stoking concern were ill-timed developments for Credit Suisse. On Tuesday, it disclosed that it had found “material weaknesses” related to its financial reporting, though the firm said it stood by its accounting.
On Wednesday, the chair of Saudi National Bank, Ammar al-Khudairy, said that his bank would not invest more money in the Swiss lender. Al-Khudairy later clarified that the move was due to regulatory reasons, but investors remained spooked: If Credit Suisse tried to raise additional capital, it could not count on its biggest shareholder to participate.
By Thursday morning, Swiss regulators had publicly certified the strength of Credit Suisse’s balance sheet, while the bank said it would make use of the Swiss central bank’s lifeline. But its stock and bond prices continued to decline, while the cost of buying insurance contracts against the firm’s default rose to alarmingly high levels.
By Friday, analysts said the continued erosion of confidence in the firm, despite the relative stability of its balance sheet, would force it to take more drastic action.