The discussions are part of urgent effort by Swiss and global authorities to restore trust in banking system
By guest authors Margot Patrick, Ben Dummet and Dana Cimilluca from the Wall Street Journal.
Patricia Kowsmann contributed to this article.
Updated March 19, 2023
UBS UBS -5.50%decrease; red down pointing triangle Group AG has offered to buy rival Credit Suisse CS -6.94%decrease; red down pointing triangle for around $1 billion in a deal engineered by Swiss regulators to restore trust in the banking system, according to people familiar with the matter.
One option would involve buying the entirety of Credit Suisse and then spinning off its local Swiss operations into an independent entity, the people said. UBS would keep Credit Suisse’s valuable wealth-management business.
Discussions are continuing and the contours of the deal could still change as UBS and Swiss regulators hash out details of the plan and to what extent Swiss authorities would provide guarantees or backstops.
Officials are racing to consummate the deal before markets open in Asia, the people said. Regulators have offered to waive a requirement for customary shareholder votes to expedite the sale, one of the people said.
An issue in the discussions is what cost-saving UBS would be allowed to generate by Swiss authorities through moves such as job cuts, a key factor in how much UBS can afford to pay for the deal, the people said.
UBS would only keep parts of Credit Suisse’s investment bank that fill gaps either geographically or in certain product areas where UBS lacks a presence.
The price would be a substantial discount to Credit Suisse’s market value, which closed Friday at around $8 billion. UBS would be taking on large unknown costs and the complexities of integration. Some rich customers keep money at both banks and after a merger might decide to take some of their money to third parties for diversification purposes.
The size of UBS’s offer was reported earlier by the Financial Times.
Credit Suisse’s AT1 bonds are expected to be substantially written down, relieving some of the debt burden UBS would take on, according to some of the people familiar with the matter.
An end to Credit Suisse’s nearly 167-year run would mark one of the most significant moments in the banking world since the 2008 financial crisis. It also would represent a new global dimension of damage from a banking storm started with the sudden collapse earlier this month of Silicon Valley Bank.
Credit Suisse took a more-than-$50 billion Swiss National Bank liquidity lifeline this week after concerns deepened about its prospects. The action didn’t do enough to stop the slide in Credit Suisse’s shares or stem the loss of bank deposits, compelling the central bank and Switzerland’s top financial regulator to orchestrate talks with Credit Suisse’s larger rival, UBS.
The urgency on the part of regulators was prompted by an increasingly dire outlook at Credit Suisse, according to one of the people. The bank faced as much as USD 10 billion in outflows a day last week, this person said. The regulators feared that the bank would become insolvent next week if not dealt with, and they were concerned crumbling confidence could spread to other banks.
UBS has long been seen as part of any state-backed solution for Credit Suisse, which has a balance sheet roughly half the size of UBS’s USD 1.1 trillion in total assets. Any full-scale takeover would give UBS prized businesses within Credit Suisse, such as wealth-management clients in Asia and the Middle East, but might come with less desirable units such as Credit Suisse’s troubled investment bank. It also could derail UBS’s existing strategy and perceived stability with investors.
UBS has a market capitalization of roughly USD 65 billion, versus Credit Suisse’s $8 billion, according to FactSet. It made a USD 7.6 billion net profit in 2022, while Credit Suisse posted a USD 7.9 billion net loss.
Credit Suisse’s local retail bank, a sticking point in the talks, could on its own be worth USD 10 billion, according to analysts. Combining it directly with UBS would create a domestic- banking behemoth with around 30 % of the country’s domestic loans and deposits.
Credit Suisse’s large legal bills are expected to be backstopped by the Swiss government and moved to a separate entity, according to one of the people.
The bank’s legal costs spiralled in recent years from banker misconduct and regulatory settlements. It estimated in February that it could have to pay up to around another USD 1.3 billion not accounted for. It also faces other litigation, such as around investment funds it ran with collapsed financing partner Greensill Capital.
Another issue is what to do with Credit Suisse’s hobbled investment bank. Credit Suisse was in the early stages of spinning out parts of its investment bank under the name CS First Boston, led by former Credit Suisse board member Michael Klein. It agreed to pay USD 175 million to buy his company, the Klein Group.
Outside investors had started firming up their likely financial commitments to the CS First Boston venture in recent weeks, according to people familiar with the matter. Swiss regulators are concerned that the plan is too complicated to be a part of the merger, and some potential investors in CS First Boston aren’t willing to rush into any commitments, the people said.
Both Credit Suisse and UBS are deemed systemically important in Switzerland and globally, and a combination could be subject to additional oversight and capital charges. Credit Suisse had around 50000 employees at the end of 2022, including more than 16000 in Switzerland. It has investment-banking units in cities including New York, London and Singapore, an operations hub near Raleigh, N.C., and employs thousands in technology in India and Poland. UBS has around 74000 employees globally.
Any combination likely would result in substantial job losses beyond the more than 9000 positions Credit Suisse already had promised to eliminate as part of its turnaround plan.
Credit Suisse has billions of dollars in deferred employee compensation and prospective legal settlements, according to its financial statements. In January, it set up a capital-release unit it said would take years to work through.
Credit Suisse’s slide toward state assistance came after other banks and large investors pulled back last week from doing business with the Swiss lender. Other investment firms stopped trading with the bank in the fall, as its yearslong problems got worse, people familiar with the matter said.
Analysts have been concerned about rich customers pulling their money. Executives at other banks said they got inflows from Credit Suisse clients last week.
The impact of a deal on wider financial markets will depend on the details and how much support, if any, regulators provide. Credit Suisse has over USD 160 billion of long-term debt, some of which is classified as bail-in instruments, which can get wiped out in case regulators force the bank into a restructuring.
Using UBS to save Credit Suisse marks a turnaround from nearly 15 years ago, when Switzerland bailed out UBS after it got stuck with billions of toxic assets in its U.S. business. Credit Suisse declined state aid at the time and emerged from the crisis in stronger shape.
It went on to be battered by stricter financial regulation and costly settlements with regulators. The bank underwent a series of restructurings. Credit Suisse’s latest management team, some who worked previously at UBS, had appealed for more time to prove they could turn things around.