By Amanda Cooper, Tom Westbrook and John Revill
(Reuters) – Banking stocks and bonds fell sharply on Monday as the hit to investors from UBS Group’s state-backed takeover of Credit Suisse fanned concerns about the health of the global banking sector.
UBS Group AG shares sank by 7% amid concerns among investors about the long-term benefits of the deal and the outlook for banks in Switzerland, a country once seen a paragon of sound banking.
In a package engineered by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse Group AG and assume up to $5.4 billion in losses.
Roger Nordmann, leader of the Social Democrats (SP) in the Swiss parliament, said the deal creates enormous risk for Switzerland and UBS, and blamed Credit Suisse’s leadership for the bank’s failure.
“What has happened is terrible for the credibility of Switzerland,” he said.
Investor focus has now shifted to the massive blow some Credit Suisse bondholders will take, adding to anxiety about other risks to the banking sector including contagion and the fragile state of U.S. regional lenders.
European bank shares slumped, with an index of leading lenders down 2.3%. German banking giants Deutsche Bank and Commerzbank dropped 3.1% and 3.3% respectively, while France’s BNP Paribas fell 3.7%.
The sharp moves followed heavy selling in Asian markets as early optimism quickly evaporated.
“A week can be a very long time in financial markets. UBS acquiring Credit Suisse for 3 billion francs a week ago would have seemed like a terrific deal. Now the position is less clear,” said Johann Scholtz, analyst at Morningstar, adding the acquisition should ultimately benefit UBS.
The cost of insuring exposure to the debt of the continent’s lenders rose, with UBS’s credit default swap widening to 153 basis points from 117 bps, S&P Global Market Intelligence data showed.
CO-ORDINATED ACTION
Investors appeared to have shrugged off promises by top central banks over the weekend to provide dollar liquidity to stabilise the financial system.
In a global response not seen since the height of the pandemic, the U.S. Federal Reserve said it had joined central banks in Canada, England, Japan, the EU and Switzerland in a co-ordinated action to enhance market liquidity.
The European Central Bank vowed to support euro zone banks with loans if needed, adding the rescue of Credit Suisse was “instrumental” in restoring calm.
The banking sector lurched into crisis earlier in March with the failure of U.S. lenders Silicon Valley Bank and Signature Bank before ensnaring its biggest name yet in Credit Suisse.
Problems remain in the U.S. banking sector, where shares are still under pressure despite several large banks depositing $30 billion into First Republic Bank, another institution rocked by the failures of Silicon Valley and Signature Bank.
On Sunday, S&P Global downgraded First Republic’s credit ratings deeper into junk, saying the deposit infusion may not solve its liquidity problems. Its shares were sharply lower again in premarket dealing on Monday.
RECALIBRATING RISK
The shotgun Swiss banking marriage is backed by a massive government guarantee, helping prevent what would have been one of the largest banking collapses since the fall of Lehman Brothers in 2008.
The Swiss regulator also decided that Credit Suisse’s additional tier-1 (AT1) bonds with a notional value of $17 billion will be valued at zero, angering some holders of the debt who thought they would be better protected than shareholders.
AT1 bonds – a $275 billion sector also known as “contingent convertibles” or “CoCo” bonds – can be converted into equity or written off if a bank’s capital level falls below a certain threshold.
Prices of AT1 bonds issued by other European banks such as Deutsche Bank, HSBC, UBS and BNP Paribas dropped 10-12 cents, data from Tradeweb showed.
“There are certain rules that everybody thinks are being followed, and there’s been this one very puzzling treatment of these bonds,” Allianz advisor Mohamed El-Erian told Britain’s Sky News.
“People are recalibrating what they thought the risk was,” he said.
QUESTIONS FOR UBS
The deal to buy Credit Suisse will make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.
(Graphic: Tale of two banks Tale of two banks – https://www.reuters.com/graphics/CREDITSUISSE-CRISIS/klvygqzoqvg/chart.png)
On Monday, Credit Suisse’s banking operations appeared to be business as usual at its major offices in Asia.
Monetary authorities in Singapore and Hong Kong, where Credit Suisse hosts large regional offices, separately said the Swiss bank’s business continued without interruption.
Credit Suisse staff arriving to work in Hong Kong and Singapore on Monday morning, however, fretted about retrenchments and retaining business.
UBS CEO Ralph Hamers said there were still many details to be worked through.
“I know that there must be still questions that we have not been able to answer,” he said. “And I understand that and I even want to apologise for it.”
($1 = 0.9280 Swiss francs)
(Reporting by Stefania Spezzati, Oliver Hirt and John O’Donnell in Zurich; Additional reporting by Lananh Nguyen, Saeed Azhar, Hannah Langby, Julie Zhu, Karin Strohecker and Reuters bureaus; Writing by Sam Holmes and Toby Chopra; Editing by Muralikumar Anantharaman, Kirsten Donovan)
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