Bank shares slide after UBS agrees ‘emergency rescue’ of Credit Suisse

Senin, 20 Maret 2023

Bank shares slide after UBS agrees ‘emergency rescue’ of Credit Suisse – business live - The Guardian

From 2h ago

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The world’s leading central banks are taking action to offset growing strains in the global financial system, as UBS agrees to buy Credit Suisse in an emergency, cut-price deal that may stem the panic in the banking sector.

But UBS’s move hasn’t cheered the markets, with bank shares under pressure again today as $17bn of risky Credit Suisse bonds are wiped out in the deal.

Late last night, the world’s top central banks announced their first coordinated action since the market turmoil began this month.

The Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank announced they would boost liquidity in their standing US dollar swap arrangements.

The central banks said the action was designed to enhance the provision of liquidity through the standing US dollar liquidity swap.

It means there should be improved global access to dollar liquidity, to ease strains in global funding markets.

The move came at the start of a new week likely to be dominated by the banking crisis.

The deal hammered out yesterday sees UBS pay almost $3.25bn (£2.65bn) for Credit Suisse, or 0.76 Swiss francs per share in its own stock. That’s far below Credit Suisse’s closing price of 1.86 Swiss francs on Friday, and was agreed after a frenetic weekend of negotiations.

UBS chairman Colm Kelleher said Credit Suisse was a “very fine asset we are determined to keep”, adding:

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue.”

Swiss regulators pushed for a deal, before the financial markets reopened today, as the market turmoil enters its third week.

Credit Suisse was a systemically important bank, as the Swiss National Bank president, Thomas Jordan, explained:

“It was indispensable that we acted quickly and find a solution as quickly as possible”

While shareholders will see their stakes priced down, some bond holders are also taking a loss. Some $17bn of risky bonds issued by Credit Suisse are being wiped out as part of the deal. Those contingent convertible bonds, or CoCos, also known as Additional Tier 1 (AT1) bonds, are designed to take losses when institutions hit trouble.

Swiss finance minister Karin Keller-Sutter insisted the UBS deal was the best solution.

She told a press conference last night that:

“This is no bailout. This is a commercial solution because UBS is taking over Credit Suisse.

The bankruptcy of Credit Suisse would have had a huge collateral damage - on the Swiss financial market also internationally.”

The Bank of England insisted last night that the financial system in the UK remains “safe and sound”.

The agenda

10am GMT: Eurozone trade balance for January
11am GMT: German Bundesbank’s monthly report
2pm GMT: ECB president Christine Lagarde testifies to the European Parliament

Filters BETA

The UBS acquisition of Credit Suisse eliminates immediate tail risks in the banking sector, argues analysts at Jefferies, but it also raises questions.

In a research note this morning, they point to the fact that UBS shareholders were not asked for approval (because emergency powers were activated) and that holders of Credit Suisse’s AT1 bonds (risky debt) are being wiped out while shareholders aren’t entirely (which breaks the usual seniority for creditworthiness).

Jefferies say:

It’s positive news that a deal could be found as there were not many alternatives, and a nationalization or unwinding of CS would likely have increased sector risks.

However, in terms of sector ramifications, while this deal significantly reduces the immediate systemic risk from CS’ weaknesses, we think two key negatives elements will also catch the eye: (1) that CS’ AT1 holders are wiped out whereas shareholders are not entirely, though normally more junior in creditworthiness, and (2) that shareholder approval was not asked on UBS’ side for this deal.

We think the objective of this transaction, while solving CS’ situation & associated risks for the system, is to reach a win/win, where UBS shareholders also get value out of this deal over time.

The low price paid (CHF 3bn) and significant safety net provided to UBS (with government guarantee) are positive, while UBS’ strategy is unchanged. However, UBS embarks significant execution risk, litigation risk, the buyback is temporarily suspended (unclear how long), UBS’ capital requirement is likely to be revised up, and management focus will be captured by this deal for many quarters, maybe years.

The turmoil in the banking sector may deter the Bank of England from raising borrowing cost again this week.

The money markets this morning indicate that the BoE is more likely to not lift interest rates, than to push them higher, when it sets monetary policy on Thursday.

No Change from the Bank is seen as a 57% possibility, while a quarter-point hike from 4% to 4.25% is seen as a 43% chance.

The increases in interest rates by major central banks in the last year or so have already added to tensions in the markets. They pushed down US government bond prices, which was the cause of the losses at Silicon Valley Bank which failed earlier this month.

Bank failures typically precede a US recession, as our economics editor Larry Elliott explains here.

Bank bonds are sliding after Swiss authorities decided to wipe out Credit Suisse’s riskier bonds as part of the rescue package, explains Alvin Tan of RBC Capital Markets.

Tan says:

The biggest one was UBS’ acquisition of Credit Suisse, supported by a CHF9bn guarantee from the Swiss government to cover potential losses from specific business lines.

However, the Swiss regulator’s decision to write-down completely CS’ additional Tier 1 bonds has sparked a selloff in bank bonds globally.

After months of uncertainty, client withdrawals, a sliding share price and existential angst, UBS’ takeover comes as a relief for Credit Suisse, says Victoria Scholar, Head of Investment at interactiveinvestor.

However its shares are still sharply lower and its bondholders face much uncertainty, Scholar explains:

Credit Suisse’s CoCo bonds, high-yield investments which are a cross between a stock and a bond have been written off, landing its AT1 bondholders with hefty losses. This has sparked nervousness about AT1 bonds more broadly with some investors retreating from them altogether.

Credit Suisse is a 167 year old institution that has been instrumental to the growth of the Swiss economy. The end of its history marks a sad day for longstanding employees and loyal customers. There will be hard yards ahead for UBS to successfully implement the takeover. Credit Suisse is likely to be vastly reduced to only its most profitable components.

UBS’ acquisition has done little to allay the market’s unease with banks nursing painful losses across Europe on Monday. Credit Suisse has opened down by more than 60% and UBS is down by over 8%.

Banks including Deutsche Bank, Commerzbank and BNP Paribas are trading sharply lower with German banks understood to have direct financial exposure of at least $11.5 billion to Swiss banks. Banks on the FTSE 100 like StanChart, Barclays and NatWest are languishing at the bottom of the UK index.”

Stephen Innes, managing partner at SPI Asset Management, says the markets risk being pulled into a ‘horrible negative feedback loop’, as authorities take action to (they hope) stem the crisis [such as the new dollar swaps announced last night].

No, if and or buts; price action in oil and safe-havens gold and yen suggests folks are still spooked, hinting we are in the process of devolving from a bank to an economic crisis when growth becomes more concerning than the crisis itself.

And if that proves accurate, a negative equity-bond correlation should see gold push higher and oil continues to tank.

Compounding matters is that the more policymakers do, the more investors expect bad news to come down the pipe, which creates a horrible negative feedback loop, almost as if investors are asking themselves “what do they know we do not know?”

The cost of insuring UBS Group debt against default has risen after it agreed to buy Credit Suisse.

UBS’s five-year credit default swaps, derivatives which are often used to gauge a borrower’s credit risk, widened to 153 basis points from 117bps on Friday, according to S&P Global Market Intelligence data.

Shares in UBS have dropped by 8.7% in early trading, as investors react to its cut-price takeover of Credit Suisse.

Shares in Credit Suisse have tumbled by over 60% at the start of trading.

They have plunged to 0.7 Swiss francs, down from 1.86 Swiss francs on Friday night.

That takes them down to the level UBS’s cut-price rescue package (0.76 Swiss francs per share in its own stock), and on track for their biggest one-day fall ever.

European banking stocks are down 3.2% to their lowest level in three months.

European stock markets are open, and falling as investors give their verdict on last night’s emergency rescue of Credit Suisse.

In London, financial stocks are leading the fallers, with Standard Chartered down 6.6%, Barclays off 5.6%, Prudential off 4.3%, NatWest falling 3.8% and Lloyds Banking Group down 3.5%.

This has pulled the FTSE 100 index down by around 0.75% in early trading, to 7281. That’s its lowest point since last November.

Other European banks are also falling, with Deusche Bank down 6%, BNP Paribas falling 4.2%, and Société Générale dropping 4.4%.

The chief executive of UBS has insisted this morning that his bank can handle the takeover of Credit Suisse.

Ralph Hamers told broadcaster SRF that UBS could handle the risks of combining with Credit Suisse.

Hamers said (via Reuters).

“We have a very good capital ratio at UBS, and we also have a very good liquidity position. So we have contained the risks in the markets.

“The second step for us is to transform CS’s investment bank into an investment bank like UBS has. We call this a capital-light investment bank. In doing so, we are not taking so much risk.”

Hamers did not have any information about potential lay-offs at Credit Suisse, saying that there are no definite plans at present.

“There are certainly opportunities and chances for growth.

The many employees - CS has 50,000 worldwide - also have a new future together with us. And together we can build an even more beautiful bank.”

The many scandals at Credit Suisse in recent years have tainted Switzerland’s financial sector. But Hamers added that the takeover would ‘uphold’ the reputation of the Swiss financial market, and also provide stability and security for Credit Suisse clients.

Hamers said:

“The takeover means that we are bringing back stability and security for CS clients.

“But also that we are upholding the reputation of the Swiss financial centre.”

There is unease in Switzerland over the impact of the UBS-Credit Suisse deal on its banking sector, and the prospect of job cuts.

The Swiss Bank Employees Association, in a statement to Reuters, has demanded that UBS keep job cuts to an “absolute minimum”.

They warned:

“The jobs of very many employees are at stake,”

The association added that it was in touch with management.

The head of the Bank of France has insisted that French banks are ‘solid’, following UBS’s emergency deal to buy Credit Suisse.

Francois Villeroy de Galhau told Le Monde newspaper that he welcomed Switzerland’s move, and that French banks were stable and profitable.

Villeroy said:

“Regarding Credit Suisse, this is a bank which for several years now had problems regarding its business model and profitability, as well as insufficient internal controls.

The Swiss authorities were well mobilised this weekend to tie it up to UBS, which is a welcome solution.

“The French banking industry is concentrated around six big banks which all have solid and profitable business models, strong control on their risks, and a high degree of regulatory compliance.

Villeroy, who is also a member of the European Central Bank’s governing council, added:

“To once again state the obvious, French banks are solid.”

The oil price has hit its lowest level since December 2021, as traders fear that the banking crisis will pull economies into recession.

Brent crude, the international benchmark, has dropped by 2.5% this morning to $71.13 per barrel, extending its recent slide.

US crude oil prices are also weakening, with a barrel of West Texas Intermediate down 2.8% at $64.85 per barrel.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:

Crude oil kicked off the week under pressure, below the $70pb level as the bank stress weigh on global growth prospects and sent the price of a barrel below this psychological level.

Shares in major banks are sliding this morning, as initial relief over the emergency rescue of Credit Suisse fades.

Investors are concerned about the massive hit some Credit Suisse bondholders would take under the UBS acquisition, given that $17bn worth of riskier AT1 bonds are being wiped out under the deal (see opening post).

That decision, by the Swiss regulator, has angered some debt holders thought they would be better protected than shareholders in the takeover deal announced on Sunday.

This has created worries about what that might mean for holders of AT1 bonds issued by other banks , at a time of high nervousness about the financial system.

Shares in Standard Chartered have fallen 5% in Hong Kong trading, while HSBC has tumbled 7%, pulling the Hang Seng index down by other 3%.

European markets are set for fresh losses, with the FTSE 100 index being called down over 1% when trading begins at 8am.

Having come off the worst week for European equity markets this year, volatility looks set to continue this week, warns Michael Hewson of CMC Markets.

Hewson explains:

With Credit Suisse shareholders and some bondholders taking a huge hit, banks in Asia have taken a hit on similar concern about their AT1 bond holding values, while the weekend deal still presents the Swiss National Bank and Swiss Government with untold headaches, with the size of the newly merged bank set to dwarf the size of the Swiss economy. The phrase too big to fail really does spring to mind here, and this morning’s weakness in Asia markets serves to reinforce concerns about these types of writedowns and any spillover effects on the rest of the banking sector.

As for Credit Suisse, it is in no position to dictate the price of any rescue package given the problems it was facing, and if its shareholders are unhappy with the price they’ve got, they should have stumped up the extra cash themselves!

Financial market regulators around the world have welcomed the news that UBS will buy Credit Suisse for $3.25bn.

The Bank of England said last night it had been ‘engaging closely with international counterparts while the UBS-Credit Suisse deal was being agreed.

We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability. We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation.

The UK banking system is well capitalised and funded, and remains safe and sound.

Christine Lagarde, President of the European Central Bank, said the ECB has the tools it needs to provide more support, if needed.

“I welcome the swift action and the decisions taken by the Swiss authorities. They are instrumental for restoring orderly market conditions and ensuring financial stability.

The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”

Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen insisted America’s banking sector was strong;

“We welcome the announcements by the Swiss authorities today to support financial stability.

“The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation.”