Banking Crisis

Speculation Grows On UBS Acquisition Of Embattled Rival - Report

Tom Burroughes Group Editor 18 March 2023


A question mark about a UBS-Credit Suisse combination – which has been speculated on for some time – is that it would create a dominant bank in the Alpine state, adding to fears that such a bank could, in future, be “too big to fail” and create a headache in the event of another financial crisis. The recent saga has hurt Switzerland's financial reputation.

UBS is asking the Swiss government for protection to cover future risks if it decides to buy embattled Credit Suisse, Bloomberg reported today (18 March), citing unnamed sources. The report was one of several that speculated on the possibility that UBS, Switzerland’s largest bank, will buy all or part of Credit Suisse, the country’s second largest lender.

UBS is discussing scenarios in which the government would take on certain legal costs and potential losses in any deal, Bloomberg said. UBS is looking at moves at the urging of regulators to halt a crisis of confidence.

Last week, shares in Credit Suisse whipsawed. The bank disclosed in its delayed annual report for 2022 that it had identified "material weaknesses" in internal controls over financial reporting. The Swiss bank had not yet stemmed customer outflows. Shares initially slumped earlier last week after the collapse of Silicon Valley Bank in the US and after the chair of the Saudi National Bank, which bought a 10 per cent stake in Credit Suisse last year, ruled out providing the Swiss lender with any more financial assistance. However, Credit Suisse’s shares later surged on its credit line announcement with the Swiss National Bank. 

Reputational damage
Based on conversations that WealthBriefing has had with figures in the financial sector in Zurich and Geneva in recent days, the misfortunes and scandals around Credit Suisse have hurt not just the bank itself but the wider reputation of the Swiss banking industry. Long a model of discretion and efficiency, the Swiss industry has found the Credit Suisse story particularly painful.

The Bloomberg report said that in one scenario, the deal would involve UBS acquiring Credit Suisse to obtain its wealth and asset management units, while possibly divesting the investment banking division.

Talks are still ongoing on the fate of Credit Suisse’s profitable Swiss universal bank unit, the report said.

Credit Suisse has already announced steps to cut costs, spin off much of its investment banking arm, reduce risk-weighted assets, and pivot more towards wealth management and advisory activity that requires relatively little capital. (See its Q4 and 2022 full-year results.)

The news report said UBS and Credit Suisse declined to comment.

A question mark about a UBS-Credit Suisse combination – which has been speculated on for some time – is that it would create a dominant bank in the Alpine state, adding to fears that such a bank could, in future, be “too big to fail” and create a headache in the event of another financial crisis. A decade ago, UBS was itself mired in trouble and had to be bailed out – albeit temporarily – by the Swiss government. It also was embroiled in a legal wrangle with US authorities about providing overseas accounts to wealthy US citizens.

Credit Suisse has been plagued by scandals and missteps, such as spying on a former banker who had defected to work for UBS; claims (which it has denied) that it had offered and provided services to criminals and tax evaders; its losses from the UK-based Greensill Capital supply-chain finance business, and the US-based hedge fund/family office Archegos Capital Management.

Both banks are “systemically important” banks in terms of how the Swiss National Bank, and Swiss Financial Regulatory Authority, or FINMA, could not allow these banks to collapse. 

Contagion worries
The saga has also raised concerns that despite all the changes supposedly imposed since the 2008 financial crisis, cracks remain in the banking system. Switzerland has had – until recently – negative official interest rates to hold down the Swiss franc’s exchange rate.

One consequence of Credit Suisse’s woes, such as losing a net outflow of SFr110 billion ($119 billion) in the fourth quarter of 2022 alone, is that it will drive money into Switzerland’s external asset management sector, as well as into rival banks. Another likely result is that it will encourage Credit Suisse bankers to leave.

“The Credit Suisse saga is clearly a highly concerning matter for all of us here in Switzerland. It is a huge domestic bank and of systemic importance. Credit Suisse’s reputation has suffered ‘death by a thousand cuts’, due to the many scandals, management issues and financial reporting issues. Its reputation has been in tatters for some time,” Egon Vorfeld, managing partner, The Forum Finance Group, an EAM, told this news service.

“The European and Swiss banking sector generally is rather robust and has stronger regulatory overview than in the US, it seems. Credit Suisse, despite all its problems, also remains robust if one looks at all their ratios: 150 per cent liquidity coverage ratio, 13 per cent CET1, small unrealised losses, etc,” he said. “Without the crisis of confidence in the management team one wouldn’t normally expect such a strong market reaction,” he continued. 

“We are mindful of the increased probability that some other institution will not have managed their risk well during this time of extremely volatile rates across the yield curves,” Vorfeld said. “This is why we are reluctant to add to our banking exposure just yet - despite their very attractive valuations.”

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