The Swiss Federal Department of Finance (FDF), the Swiss Financial Market Supervisory Authority (FINMA), and the Swiss National Bank (SNB) have offered their full support for the proposed acquisition of Credit Suisse by global investment banking peer UBS.
As part of the “all-share” transaction, Credit Suisse shareholders have been offered one UBS share for every 22.48 Credit Suisse shares, representing approximately CHF 0.76 (AU$1.22) per share for a total consideration of CHF 3 billion (AU$4.8 billion).
The deal is not subject to shareholder approval, with UBS securing a pre-agreement from Swiss regulators to accelerate the acquisition.
Once finalised, the acquisition would involve “managing down” Credit Suisse’s investment bank while reinforcing UBS’ global investment strategy, with the combined investment business to account for approximately 25 per cent of group risk weighted assets.
Together, the businesses are tipped to manage over AU$5 trillion in invested assets across global markets, of which, approximately AU$2.2 trillion would be invested in Europe.
The combined business is projected to generate annual run-rate of cost reductions exceeding AU$11.9 billion by 2027.
According to UBS, the deal would be earnings per share (EPS) accretive by 2027 and would retain a common equity tier 1 (CET 1) ratio above 13 per cent.
“Bringing UBS and Credit Suisse together will build on UBS’ strengths and further enhance our ability to serve our clients globally and deepen our best-in-class capabilities,” UBS chief executive officer and the prospective group CEO of the merged institution, Ralph Hamers, said.
“The combination supports our growth ambitions in the Americas and Asia while adding scale to our business in Europe, and we look forward to welcoming our new clients and colleagues across the world in the coming weeks.”
But UBS chairman Colm Kelleher, who would serve as chair of the combined entity, acknowledged the implications of the deal for Credit Suisse amid ongoing concerns over its viability.
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” he said.
“We have structured a transaction which will preserve the value left in the business while limiting our downside exposure. Acquiring Credit Suisse’s capabilities in wealth, asset management, and Swiss universal banking will augment UBS’ strategy of growing its capital-light businesses.
“The transaction will bring benefits to clients and create long-term sustainable value for our investors.”
The announcement of UBS’ proposed acquisition comes just days after Credit Suisse confirmed plans to “pre-emptively” strengthen its liquidity by exercising an option to leverage a Covered Loan Facility and a short-term liquidity facility offered by the SNB.
The “fully collateralised" facilities are valued at approximately AU$81 billion.
Separately, Credit Suisse offered to repurchase US$10 denominated senior debt securities via a tender offer, valued at up to US$2.5 billion (AU$3.7 billion), while also launching a cash tender offer for four Euro denominated senior debt securities at an aggregate consideration of up to €500 million (AU$798 million).
Both offers, which expire on Wednesday, 22 March 2023, would help manage Credit Suisse’s “overall liability composition”, while also “optimising interest expense” and allowing the bank to “take advantage of current trading levels to repurchase debt at attractive prices”.
The measures aimed to address ongoing concerns over the strength of the bank’s balance sheet, which was undermined by “significantly higher withdrawals” of cash deposits and non-renewal of maturing time deposits over the fourth quarter of 2022.
These outflows “substantially exceeded” the rates experienced in the previous quarter, up from AU$21 billion to AU$180 billion.
Investor sentiment has since worsened off the back of three banking collapses in the United States, attributed to poor capital management exposed by aggressive monetary policy tightening.
But Swiss regulators sought to allay fears, stressing “strict capital and liquidity requirements” imposed on local banks have built healthy buffers to absorb shocks.
As at 31 December 2023, Credit Suisse had a Common Equity Tier 1 (CET1) ratio of 14.1 per cent and an average liquidity coverage ratio (LCR) of 144 per cent (since rising to 150 per cent as at 14 March).
The Swiss regulators also distanced the local banking system from the fallout associated with the collapse of US banks — Silvergate Capital, Signature Bank, and most notably, Silicon Valley Bank (SVB).
Credit Suisse added that unlike these US banks, it is “conservatively positioned against interest rate risks”.
The embattled bank also touted the quality of its loan book, which it said is “highly collateralised” at almost 90 per cent, with more than 60 per cent in Switzerland.
These latest developments come just days after the release of Credit Suisse’s 2022 annual report, detailing the findings of an external review of its internal control mechanisms, aimed at assessing whether the bank has provided “reasonable assurance” regarding the reliability of its financial reporting.
The review found that as at 31 December 2022, the bank’s internal processes were “not effective”, given it did not “design and maintain an effective risk assessment process” used to identify and analyse the risk of” material misstatements”.
Credit Suisse’s board of directors acknowledged “material weakness”, which may have resulted in misstatements of account balances or disclosures.
Further, the report noted observations from global consultancy firm PricewaterhouseCoopers, which found Credit Suisse “did not design and maintain an effective risk assessment process”.
However, after acknowledging these gaps, Credit Suisse stressed its financial statements as at 31 December 2022 comply with Swiss law.
The bank is reportedly developing a remediation plan to address shortcomings.
But assurances of the bank’s stability have not been enough to prevent a sell-off in the share market, with its share price plunging 35.3 per cent over the past five days, closing trading on Wednesday (15 March) at CHF 1.70 (AU$2.76).
Credit Suisse is not the only major bank to take a significant hit on the stock exchange, with an Oxford Economics analysis revealing US bank share prices fell 17.6 per cent over the five days following the collapse of California-based Silicon Valley Bank — the country’s 16th largest bank.
Across advanced economies, bank equity prices fell 10 per cent, compared to just 1.5 per cent in emerging markets.