Shares of UBS Group AG (UBSG.S) fell 7% amid concerns among investors about the long-term benefits of the deal and the outlook for banks in Switzerland, a country that was once a paragon of sound banking, Reuters reported.
In a package designed by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse Group AG (CSGN.S) and incur losses of up to $5.4 billion.
Investors’ focus has now shifted to the massive hit to some Credit Suisse bondholders, raising concerns about other banking sector risks including contagion and the fragile state of US regional lenders.
European bank stocks fell, with the major lenders index (.SX7P) down 2.3%. German banking giants Deutsche Bank (DBKGn.DE) and Commerzbank fell 3.1% and 3.3%, respectively, while France’s BNP Paribas fell 3.7%.
Eurozone bank supervisors have tried to stop a rout in the bank convertible bond market by arguing that holders of this type of debt will only incur losses after eliminating shareholders — unlike Credit Suisse, whose main regulators operate outside the currency bloc.
“The week could be a very long time in the financial markets. UBS’s acquisition of Credit Suisse for 3 billion francs a week ago would have looked like a great deal. Now the situation is less clear,” said Johann Schulz, an analyst at Morningstar, adding: The acquisition should benefit UBS in the end.
S&P Global Market Intelligence data showed the cost of insuring debt exposures to lenders on the continent rose, with UBS’ credit default swap widening to 153 basis points from 117 basis points.
common procedure
It seems that investors ignored the promises of major central banks over the weekend to provide dollar liquidity to stabilize the financial system.
In a global response not seen since the height of the pandemic, the US Federal Reserve said it has joined the central banks of Canada, England, Japan, the European Union and Switzerland in coordinated action to boost market liquidity.
The European Central Bank pledged to support eurozone banks with loans if needed.
The banking sector plunged into crisis earlier in March as US lenders Silicon Valley Bank (SVB) and Signature Bank (SBNY.O) failed before signing its biggest name yet to Credit Suisse.
The Fed’s relentless interest rate increases to crush inflation were seen as a catalyst for the collapse of SVB and Signature. Traders are now increasing their bets that the central bank will halt its hiking cycle on Wednesday in a bid to ensure financial stability and stem banking tensions escalating into a larger crisis.
US banking stocks remain under pressure despite several large banks placing $30 billion in First Republic Bank (FRC.N).
On Sunday, S&P Global downgraded First Republic’s credit rating even deeper, saying a deposit injection may not solve its liquidity problems. Its shares fell sharply again in pre-market trading on Monday.
Risk recalculation
The Swiss bank marriage is backed by a massive government guarantee, helping to prevent what could have been one of the biggest banking meltdowns since the fall of Lehman Brothers in 2008.
The Swiss regulator also decided that Credit Suisse’s additional Tier 1 (AT1) bonds with a face value of $17 billion would be valued at zero, angering some debt holders who thought they would be better protected than shareholders.
The AT1 bond — a $275 billion sector also known as “contingent convertible notes” or “CoCo” — can be converted to equity or written off if the bank’s capital level falls below a certain threshold.
Data from Tradeweb showed that prices for AT1 bonds issued by other European banks such as Deutsche Bank, HSBC, UBS and BNP Paribas fell by 10-12 cents.
“There are certain rules that everyone thinks are being followed, and there is a very confusing treatment for these bonds,” Allianz adviser Mohamed El-Erian told Britain’s Sky News.
“People are reassessing what they thought the danger was,” he said.
Questions for UBS
The Credit Suisse purchase will make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.
On Monday, it appeared to be business as usual at Credit Suisse’s main offices in Asia, but staff who arrived to work in Hong Kong and Singapore worried about downsizing and business retention.
Roger Nordmann, leader of the Social Democratic Party (SP) in the Swiss parliament, said the bailout deal creates huge risks for Switzerland and UBS, blaming Credit Suisse’s leadership for the bank’s failure.
“What happened is terrible for the credibility of Switzerland,” he said.
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