Swiss authorities broker deal for UBS to acquire Credit Suisse

The chairman of UBS, Colm Kelleher, has announced that the bank will be acquiring its rival, Credit Suisse. The acquisition deal was brokered by Swiss authorities, and it was announced on Sunday. This deal aims to boost confidence in the Swiss financial industry, and there are concerns over whether the deal holds any benefits for UBS.

UBS to acquire troubled Credit Suisse

Credit Suisse shares plunged to an all-time low last week amid concerns about the lender’s liquidity. However, after UBS announced an acquisition deal, there has been calm in the markets. The deal brokered by Swiss authorities between UBS and Credit Suisse is more focused on shoring up confidence rather than benefiting the buyer.

The Swiss government, the Swiss National bank, and regulatory bodies have noted that a UBS takeover deal was better than having Credit Suisse shut down its operations. The collapse of Credit Suisse could have triggered panic across the banking sector. Kelleher’s main role is to ensure that Credit Suisse’s woes do not infect UBS.

Some think this deal is risky, but Kelleher has several protections. The offer value for Credit Suisse shares is 60% less than what the shares were trading at on Friday. Moreover, the deal, worth a little over $3 billion, is a small fraction of the bank’s 45 billion Swiss franc book value by the end of 2022.

The Swiss government will also play a role in this deal as it will cover up to 9 billion Swiss francs worth of losses on the assets owned by Credit Suisse. FINMA will allow UBS to write off the target’s debt instruments, which will raise the combined value of equity capital.

The deal has also come with a competition waiver where Kelleher can maintain Credit Suisse’s domestic division, which gives UBS dominance in the Swiss retail and corporate banking sector.

According to the CEO of UBS, Ralph Hamers, the terms of this acquisition deal will allow the bank to trim annual expenses by around $8 billion. The savings by the bank have a net present value of around $60 billion after deducting a 24% tax and capitalizing with a 10% discount rate.

Woes facing Credit Suisse

Credit Suisse has been facing troubles amid multiple scandals over the past few years. While the acquisition is a better outcome than the lender winding down its operations, the move would result in wealthy customers that have saved funds, with the two institutions moving the funds to spread risks.

UBS might also be forced to abandon some of Credit Suisse’s clients that are deemed high risk. The investment banking division for the new acquisition is slated to shrink significantly, but this action could further spook the markets.

Nevertheless, the move made by the Swiss authorities is a long-term one, focusing on ensuring the country’s financial position is strong. The takeover has also been hailed as a more favorable outcome than the Swiss lender halting its operations if the Swiss government nationalizes the company.