After the bank’s $3 billion “emergency rescue” of struggling local rival Credit Suisse, UBS shares enjoyed a stunning recovery Monday (March 20, 2023) afternoon, erasing sharp losses.
UBS’s stock recovered from a session-high drop of over 14% to close 1.2% higher. In contrast, the stock price of Credit Suisse fell more than 55%.
Europe’s banking index rose 1.2% by the end of the session, recouping earlier losses as a sense of calm appeared to return to markets.
The turbulence began immediately after UBS decided to purchase Credit Suisse for a discounted price in an effort to reduce the risk of a contagion to the entire global financial sector.
As Credit Suisse teetered on the precipice, Swiss authorities and regulators assisted in facilitating the purchase, which was disclosed Sunday.
One issue is that the reported price of $3,25bn (CHF0.5 per share) equates to ~4% of book value, and about 10% of Credit Suisse’s market value at the start of the year. This suggests that a substantial part of Credit Suisse’s $570bn assets may be either impaired or perceived as being at risk of becoming impaired. This could set in train renewed jitters about the health of banks.
Neil Shearing
The banking industry was concerned about Credit Suisse’s scale and global reach because of its numerous foreign subsidiaries. With around 530 billion Swiss francs at the end of last year, the 167-year-old bank’s balance sheet was roughly twice as large as Lehman Brothers’ was at the time of its demise.
The combined bank will be a massive lender, with more than $5 trillion in total invested assets and “sustainable value opportunities,” UBS said in a release late Sunday.
The bank’s chairman, Colm Kelleher, said the acquisition was “attractive” for UBS shareholders but clarified that “as far as Credit Suisse is concerned, this is an emergency rescue.”
“We have structured a transaction which will preserve the value left in the business while limiting our downside exposure,” he added in a statement. “Acquiring Credit Suisse’s capabilities in wealth, asset management and Swiss universal banking will augment UBS’s strategy of growing its capital-light businesses.”
Neil Shearing, group chief economist at Capital Economics, said a complete takeover of Credit Suisse may have been the best way to end doubts about its viability as a business, but the “devil will be in the details” of the UBS buyout agreement.
“One issue is that the reported price of $3,25bn (CHF0.5 per share) equates to ~4% of book value, and about 10% of Credit Suisse’s market value at the start of the year,” he highlighted in a note Monday. “This suggests that a substantial part of Credit Suisse’s $570bn assets may be either impaired or perceived as being at risk of becoming impaired. This could set in train renewed jitters about the health of banks.”
