Banking stocks and bonds plummeted on Monday after UBS Group sealed a state-backed takeover of troubled peer Credit Suisse Group AG, a deal that was orchestrated in an attempt to restore confidence in a battered sector.
In a package engineered by Swiss regulators on Sunday, UBS Group AG 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.
Credit Suisse shares slumped 62% in premarket trade to a new low while UBS lost 7.1%. Those sharp moves followed a day of heavy selling in Asian financial markets as early investor optimism about official efforts to stem a banking crisis quickly evaporated.
In particular, investor focus has shifted to the massive hit some Credit Suisse bondholders would take under the UBS acquisition, which has added to anxiety about other key risks including contagion, the fragile state of US regional banks and the challenges for central banks as they seek to contain inflation and financial risks.
"It should be clear that after more than a week into the banking panic, and two interventions organized by the authorities, this problem is not going away. Quite the contrary, it has gone global," said Mike O'Rourke, chief market strategist, Jones Trading.
"The reports that UBS is acquiring Credit Suisse will likely magnify Credit Suisse's problems by moving them to UBS."
Under the deal, the Swiss regulator decided that Credit Suisse additional tier-1 bonds - or AT1 bonds - with a notional value of $17 billion will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders in the takeover deal announced on Sunday.
Credit Suisse's Additional Tier 1 bonds dropped sharply in early European trade with a number of dollar-denominated issues being bid at 2 cents on the dollar, Tradeweb data showed.
The Swiss banks' share tumble comes on top of what was already a rough day for banks, as investors shrugged off earlier promises by top central banks over the weekend to provide dollar liquidity to stabilize the financial system.
Standard Chartered Plc 2888.HK and HSBC 0005.HK shares each fell more than 6% in Hong Kong on Monday to more than two-month lows, with HSBC facing the possibility of posting its largest one-day drop in six months. The MSCI index for financial stocks in Asia ex-Japan. MIAX0FN00PUS was down 1.3%.
Coordinated action
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.
Pressure on UBS helped seal Sunday's deal.
"It's a historic day in Switzerland, and a day frankly, we hoped, would not come," UBS Chairman Colm Kelleher told analysts on a conference call. "I would like to make it clear that while we did not initiate discussions, we believe that this transaction is financially attractive for UBS shareholders," Kelleher said.
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 apologize for it."
In a global response not seen since the height of the pandemic, the Fed said it had joined central banks in Canada, England, Japan, the EU and Switzerland in a coordinated action to enhance market liquidity. The European Central Bank vowed to support eurozone banks with loans if needed, adding the Swiss rescue of Credit Suisse was "instrumental" in restoring calm.
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.
And Credit Suisse urged its staff to go to work, according to a memo to staff seen by Reuters.
In a separate memo, the bank said as part of the takeover if job cuts proved necessary it would be communicated to staff as per guidelines. The bank will also pay bonuses as communicated before and as per schedule, the memo added.
Credit Suisse staff arriving to work in Hong Kong and Singapore on Monday morning, however, fretted about retrenchments and retaining business.
Unresolved issues
Problems remain in the US banking sector, where bank stocks remained under pressure despite a move by several large banks to deposit $30 billion into First Republic Bank, an institution rocked by the failures of Silicon Valley and Signature Bank.
On Sunday, First Republic saw its credit ratings downgraded deeper into junk status by S&P Global, which said the deposit infusion may not solve its liquidity problems.
There are also concerns about what happens next at Credit Suisse and what that means for investors, clients and employees.
In the memo to employees, Credit Suisse said that once the takeover is complete wealth management clients may want to consider moving some assets to another bank if the concentration was a concern.
The deal will also make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.
"The Credit Suisse debacle will have serious ramifications for other Swiss financial institutions. A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away," said Octavio Marenzi, CEO of Opimas, in Vienna.
UBS chairman Kelleher told a media conference that it will wind down Credit Suisse's investment bank, which has thousands of employees worldwide. UBS said it expected annual cost savings of some $7 billion by 2027.
The Swiss central bank said Sunday's deal includes 100 billion Swiss francs ($108 billion) in liquidity assistance for UBS and Credit Suisse.
Credit Suisse shares lost a quarter of their value last week. The bank was forced to tap $54 billion in central bank funding as it tried to recover from scandals that undermined confidence.