International wealth management giant UBS has agreed a deal to acquire struggling Swiss banking group Credit Suisse.
This comes several years after International Adviser reported on rumours that UBS was exploring a merger with the private banking company.
The deal is expected to create a global wealth management business with more than $5trn (£4.1trn, €4.7trn) in total invested assets and sustainable value opportunities.
Under the terms of the all-share transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF0.76/share for a total consideration of CHF3bn (£2.7bn, $3.2bn, €3bn).
After the deal is finalised, Colm Kelleher will be chairman and Ralph Hamers will be group chief executive of the combined entity. The long-term business structure of the combined business was not disclosed.
The transaction is not subject to shareholder approval. UBS has obtained pre-agreement from Swiss Financial Market Supervisory Authority (Finma), Swiss National Bank, Swiss Federal Department of Finance and “other core regulators” on the approval of the transaction.
UBS chief executive Hamers said: “Bringing UBS and Credit Suisse together will build on UBS’s strengths and further enhance our ability to serve our clients globally and deepen our best-in-class capabilities. The combination supports our growth ambitions in the Americas and Asia while adding scale to our business in Europe, and we look forward to welcoming our new clients and colleagues across the world in the coming weeks.”
Axel Lehmann, chairman of the board of directors of Credit Suisse, added: “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome. This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.”
Shares of Credit Suisse plunged 63% in early trading on 20 March after the announcement of the deal, while UBS shares were down 14% in early trading on the Swiss stock exchange.
Struggles of Credit Suisse
The deal comes several days after Credit Suisse agreed a deal for $54bn of extra funding with Switzerland’s central bank.
Credit Suisse saw its shares plunge over 30% on 15 March as insolvency rumours spread.
The bank warned it had identified ‘weakness’ in its balance sheet and has put out a series of poor results updates of late. This all followed huge losses in 2021 stemming from its relationship with failed American hedge fund Archegos.
The fears over it collapsing prompted a big sell-off across the market, with banks hit the hardest.
In November 2021, Swiss banking giant Credit Suisse announced it was combining its wealth management operations into a single global division as part of its plan to revamp its business structure and divert away from investment banking.
The group was reorganised into four divisions – wealth management, investment bank, Swiss bank and asset management – and four regions – Switzerland; Europe, Middle East and Africa (Emea); Asia Pacific (Apac) and Americas.
The bank said at the time it would be “deploying” CHF3bn of capital to its wealth management division, as well as increase the ratio of capital allocated to the wealth, Swiss bank and asset management operations compared to its investment banking arm.
Unfortunately, the bank’s change in strategy failed to take effect and has left Credit Suisse needing to merge with UBS.
Market reaction
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘’Credit Suisse was on life support and Swiss authorities believed only a full transplant of the banks divisions into UBS would restore stability to the banking system. But an operation of this magnitude is a big risk for UBS – that’s why it was only willing to pay $3.23bn, less than half the price its shares valued the bank at on Friday.
“It will not only have to accept the healthier parts of the business but its failing ones as well – particularly its investment division, which has been mired in crisis after crisis. UBS will now be looking to chop up and sell off big chunks of operations, to slim down in size, given that the combined balance sheet is twice the size of Switzerland’s economy.
“The speed at which the 167-year-old institution deteriorated, when it was previously deemed too big to fail, has rocked the banking sector. As the shockwaves continue to ripple central banks have taken rear guard action to reduce the risks of contagion. They’ve co-ordinated currency swaps to enable the smooth flow of money around the world, to ensure financial institutions can easily tap into the dollars they need to operate.
“It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over. Shares in Standard Chartered and HSBC listed in Hong Kong fell by 7% after immediate relief at the Credit Suisse deal evaporated. Smaller lenders will be in focus again, particularly in the US, after First Republic Bank shares tanked by more than 30% despite the $30bn lifeline given to it by large US banks.”
Johann Scholtz, analyst at Morningstar, added: “A week can be a very long time in financial markets. UBS acquiring Credit Suisse for CHF3bn a week ago would have seemed like a terrific deal. Now the position is less clear. Credit Suisse likely experienced significant net outflows of client assets last week, eroding its revenue base. We, however, believe that UBS can extract value from the acquisition.
“It is in a much better position to execute a radical restructuring of Credit Suisse’s business than Credit Suisse was. We calculate that the UBS 2027 cost savings target would reduce Credit Suisse’s 2022 adjusted operating expenses by around 60%.
“The restructuring will come with material costs, but UBS is better placed than Credit Suisse to absorb this. The challenge for UBS will be to keep revenue attrition to a minimum during the restructuring period. UBS looks set to keep all of Credit Suisse’s businesses except the securities trading operations, which it will wind down. UBS is looking to move quickly to wind down the securities business, but it did warn in the conference call that some positions have very long durations.
“Credit Suisse shareholders will feel short-changed, but salvaging at least something is the best outcome under current circumstances.”
