Credit Suisse and UBS shares plummet after takeover announcement

GENEVA — Credit Suisse shares plunged 63% early Monday after announcing that banking giant UBS would buy its ailing rival for nearly $3.25 billion in a deal orchestrated by regulators to stem further market-shattering turmoil in the US to fend off the global banking system.

UBS shares lost 14% in early trading on the Swiss stock exchange.

Swiss authorities have urged UBS to take over its smaller competitor after a plan by Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and customers of the bank. Shares in Credit Suisse and other banks tumbled after the collapse of two banks in the US raised questions about other potentially shaky global financial institutions.

Credit Suisse is among 30 financial institutions known as global systemically important banks, and authorities are concerned about the consequences of a failure.

The agreement is “one of great importance for the stability of international finances,” said Swiss President Alain Berset when he announced it on Sunday evening. “An uncontrolled collapse of Credit Suisse would have unforeseeable consequences for the country and the international financial system.”

Switzerland’s executive branch, a seven-member governing body that includes Berset, has issued an emergency decree allowing the merger to proceed without shareholder approval.

Despite regulators’ efforts to restore calm, markets remain jittery. Global stock markets slumped on Monday, with Hong Kong’s main index falling more than 3%. Market benchmarks in Frankfurt and Paris opened up more than 1%. Shanghai, Tokyo and Sydney also declined. Wall Street futures are down 1%. Oil prices plummeted more than $2 a barrel.

Credit Suisse Chairman of the Board of Directors Axel Lehmann called the sale to UBS “a clear turning point”.

“It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets,” Lehmann said, adding that the focus is now on the future and on Credit Suisse’s 50,000 employees 17,000 in Switzerland.

Following news of the Swiss deal, the world’s central banks announced coordinated steps to stabilize banks, including access to a credit facility for banks to borrow US dollars when they need them, a practice that began during the 2008 crisis was widespread. Three months after the collapse of Lehman Brothers in September 2008, such swap lines had been tapped for $580 billion. Swap lines were also introduced during the market turmoil in the early stages of the COVID-19 pandemic.

“Today is one of the most significant days in European banking since 2008 with far-reaching implications for the industry,” said Max Georgiou, analyst at Third Bridge. “These events could change the course not only of European banking but also of the wealth management industry in general.”

Colm Kelleher, UBS President, hailed “huge opportunities” from the takeover and highlighted his bank’s “conservative risk culture” – a subtle swipe at Credit Suisse’s reputation for bolder gambles in search of higher returns. He said the combined group would create a wealth manager with over $5 trillion in total invested assets.

UBS officials said they plan to sell parts of Credit Suisse or downsize the bank.

Swiss Finance Minister Karin Keller-Sutter said the Council “regrets that the bank, which was once a flagship institution in Switzerland and part of our strong location, could find itself in this situation at all.”

The combination of the two largest and best-known Swiss banks, each with a turbulent history dating back to the mid-19th century, matches Switzerland’s reputation as a global financial center and is on the verge of a single national banking champion.

The deal follows last week’s collapse of two major US banks, which prompted a frantic, broad-based response from the US government in a bid to stave off further panic.

European Central Bank President Christine Lagarde praised the “quick action” taken by Swiss officials, saying they were “vital to restoring orderly market conditions and ensuring financial stability”.

She reiterated that the European banking sector is resilient, with strong financial reserves and cash plentiful. Banks are “in a completely different position to 2008” during the financial crisis, also because of stricter government regulation, she said.

The Swiss government is supporting the takeover with over 100 billion Swiss francs.

About 16 billion Swiss francs ($17.3 billion) of Credit Suisse bonds will be wiped out as part of the deal. European banking regulators use a special type of bond designed to provide banks with a cushion of capital in times of crisis. The bonds are set to be wiped out when a bank’s capital falls below a certain level, and that was triggered by the government-brokered deal.

That has worried the market for those bonds and other banks that hold them.

Berset said the Federal Council had been discussing Credit Suisse’s problems since earlier this year and held urgent meetings last week.

Investors and banking industry analysts were still digesting the deal, but at least one analyst suggested the deal could damage Switzerland’s global banking image.

“A nationwide reputation for prudent financial management, solid regulatory oversight, and, frankly, a somewhat dour and boring attitude towards investing has been snuffed out,” Octavio Marenzi, CEO of consulting firm Opimas LLC, said in an email.

The Financial Stability Board, an international body that oversees the global financial system, named Credit Suisse one of the world’s most important banks, meaning regulators feared a collapse like that of Lehman Brothers would affect the entire financial system 15 years ago could.

Credit Suisse’s parent bank is not part of European Union supervision but has branches in several European countries that are.

Credit Suisse’s problems resurfaced after it reported managers had identified “material weaknesses” in its internal controls over financial reporting. This fueled fears that it would be the next domino to fall. Many of its problems are unique and different from the weaknesses that brought down Silicon Valley Bank and Signature Bank. Their failure prompted a significant rescue effort by the Federal Deposit Insurance Corp. and the Federal Reserve to prevent a crisis similar to that of 2008.

Credit Suisse shares fell to a record low on Wednesday after its biggest investor, the National Bank of Saudi Arabia, announced it would stop investing money in the bank to avoid violating regulations that would come into effect if its stake were to be sold would increase by about 10%.

Shares fell 8% on Friday to close at 1.86 francs ($2) on the Swiss stock exchange. The share has come a long way: in 2007 it was listed at over 80 francs.

UBS is bigger, but Credit Suisse still wields significant influence with $1.4 trillion in assets under management. It has major trading offices around the world, caters to the wealthy through its wealth management business and is a key M&A advisor. Unlike UBS, the bank survived the 2008 financial crisis without help.

Credit Suisse is trying to raise money from investors and launch a new strategy to overcome a series of problems including bad bets on hedge funds, repeated top management reshuffles and a spy scandal involving UBS.