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With a state-backed rescue of its smaller rival Credit Suisse, a risky bet that increases the Swiss economy's dependence on a single institution, UBS Group became Switzerland's sole global bank.
The unprecedented action, which was disclosed late on Sunday in Zurich, marked the end of regulators' battle against time to prevent a crash in global markets. In order to protect the lender from further risks, Switzerland is offering more than 160 billion francs ($173 billion) in loans and guarantees to support the new group.
The deal, which is the first global bank bailout since the 2008 financial crisis, gives UBS tremendous power and eliminates its major rival. It will alter the banking landscape in Switzerland, where Credit Suisse and UBS branches are scattered all over the place, often just a few meters apart.
The two lenders have supported international finance for many years. In a country whose economy is strongly reliant on finance, the banks—two of the most systemically important in global finance—hold combined assets amounting to up to 140% of Swiss GNP.
After the financial crisis of 2008, politicians vowed never to bail out banks ever again. The Credit Suisse rescue, which involved using public funds, demonstrates how vulnerable banks are and how their issues may easily spread to their home country.
Yet because UBS intends to reduce the size of Credit Suisse's investment bank, it also eliminates a rival to Wall Street.
"Under normal circumstances, I would say it is an absolutely fantastic deal for UBS," Johann Scholtz, an equity analyst at Morningstar who focuses on European banks in Amsterdam says. "In the current environment, it is a bit more complicated as there is a lot of uncertainty generally in the markets."
Soon after the announcement, several central banks—including the Federal Reserve, the European Central Bank, and the Bank of Japan—announced plans to strengthen dollar swap lines in an effort to assuage investors' fears over the state of the banking industry. Over the past week, the collapse of two U.S. banks and a crash in Credit Suisse shares have shocked the markets.
The 167-year-old Credit Suisse will be acquired by UBS for $3.2 billion, and UBS will take on at least $5.4 billion in losses from unwinding its derivatives and other risky asset holdings. At Friday's closing price, Credit Suisse had a market value of nearly $8 billion.
Investors of the Additional Tier 1 bonds issued by Credit Suisse will lose everything, and in a contentious move, they will be secondary to equity holders who would receive at least some UBS shares.
It represents a shocking turn of events for the banks. During the Great Financial Crash, UBS, not Credit Suisse, required government assistance.
Over the past year, the fortunes of the banks have sharply diverged. In 2022, UBS made a $7.6 billion profit while Credit Suisse suffered a $7.9 billion loss. Shares of Credit Suisse are down 74% from a year ago, while those of UBS are almost flat.
With Credit Suisse's dominance in the rest of Asia, the region with the fastest economic growth, UBS now takes the indisputable top spot in the world for handling wealthy clients' money. This makes UBS the undisputed global leader in this field. The domestic bank, which is Credit Suisse's crowning achievement, will also remain with UBS.
"In the past, when a deal between Credit Suisse and UBS was discussed, a sticking point would be concentration, especially in the domestic market," according to Morningstar's Scholtz. "It is also the most stable part of the business, that generates quite a lot of cash. If UBS is not required to do an IPO of it, it could make sense for them to keep it, there are lots of synergies."
UBS is also eliminating a significant rival in the trading of securities. UBS made $7.1 billion in revenue through the buying and selling of stocks, bonds, and currencies. Around $3.2 billion was posted by Credit Suisse last year.
The failure of Credit Suisse has damaged Switzerland's status as a banking centre and rocked the world of finance.
Finance Minister Karin Keller-Sutter defended the rescue, saying it was good for Credit Suisse account holders, including her, at a press conference to announce the deal. She claimed to bank with UBS as well. Bank selection will soon come to an end.
She acknowledged that there were risks in her proposed solution but downplayed any worries about the scale of the new bank, claiming that any other course of action could result in "irreparable economic turmoil."
To meet UBS's conservative culture, the new business would be stripped of risks like investment banking, according to UBS Chair Colm Kelleher.
"A new UBS will remain rock solid," he assured.
Axel Lehmann, Chair of Credit Suisse, on the other hand, was dejected as his bank failed to recover from a string of scandals and losses. Clients withdrew tens of billions in late last year due to rumors that the bank might fail, which effectively sealed its demise.
Sunday was a "historic, sad day," according to him.
10,000 employees may be at risk, sources told Reuters on Saturday, and workers at the Zurich headquarters are preparing for significant layoffs.
Yet, things will not be easy for UBS.
According to analysts at Jefferies, the bank faces risks in order to close the deal, including potential litigation charges and future requests for the lender to hold additional capital from authorities.
Furthermore, they said that the deal would divert management's attention for many months or even years.
Ralph Hamers, chief executive officer of UBS, who will head the new banking behemoth, stated that "We will change, but we will not change that much. We will still be Swiss."
By fLEXI tEAM