Acquisition of Credit Suisse by UBS
On 19 March 2023, Swiss bank UBS Group AG agreed to buy Credit Suisse for billion in an all-stock deal brokered by the government of Switzerland and the Swiss Financial Market Supervisory Authority. The Swiss National Bank supported the deal by providing more than billion in liquidity to UBS following its takeover of Credit Suisse's operations, while the Swiss government provided a guarantee to UBS to cover losses of up to billion over the short term. Additionally, billion of Additional Tier 1 bonds were written down to zero.
Credit Suisse is a globally systemically important bank whose investment banking unit, First Boston, had been recently tarnished by a series of high-profile scandals. The banking crisis in the United States had caused fear among global investors and led to panic over other possibly troubled banks. Credit Suisse's share price plunged after the leading shareholder ruled out further investment into the bank due to regulatory issues. The deal was rapidly agreed upon and announced just before the Asian financial markets opened on Monday morning in order to prevent "market shaking" turmoil in the global financial markets. Soon afterward, central banks across the world announced USD liquidity measures to try and ease wider market panic and avoid a wider banking crisis.
UBS completed the acquisition on 12 June 2023.
Background
Credit Suisse and the 2008 financial crisis
was founded in 1856. Over the next 150 years it became a leader among Swiss banks, as the "gnomes of Zurich" funded the development of their nation. After buying First Boston in the late 20th century, Credit Suisse became a bulge bracket investment bank that competed with others globally such as Goldman Sachs. The 2008 financial crisis affected Credit Suisse less than peers; while the Swiss National Bank, the central bank, rescued rival UBS after no private investor was willing to do so by purchasing $60 billion of toxic assets and $5.3 billion in shares of stock from UBS as a form of a capital infusion, Credit Suisse raised a far smaller $9 billion privately from investors to strengthen its financial position.After the 2008 financial crisis, Credit Suisse's investment bank continued risky deals to compete with large U.S. financial institutions, while many large U.S. banks and UBS pursued more conservative strategies, and sold off riskier assets to de-risk their own portfolios.
Basel III was criticized as negatively affecting the stability of the financial system by increasing incentives for banks to game the regulatory framework. Notwithstanding the enhancement introduced by the Basel III standard, it argued that "markets often fail to discipline large banks to hold prudent capital levels and make sound investment decisions". The greater the systemic importance of a bank relative country's GDP, such as in the case of Swiss banks, the greater the likelihood of the bank taking excessive risks.
In the Swiss financial industry, the expression "It would be like UBS and Credit Suisse merging" was a joke to indicate the unlikelihood of something happening, and Swiss authorities rescued UBS because they preferred having two large banks. A UBS-Credit Suisse merger was nonetheless long rumored. Tidjane Thiam, Credit Suisse CEO from 2015 to 2020, often discussed the idea with colleagues. As Credit Suisse weakened, UBS executives planned for how to acquire its rival, and what governmental help it would need. To avoid again using public funds if a large bank needed help, Swiss authorities planned to write off its stock and bonds as needed.
Losses in investment banking arm
Credit Suisse chairman Axel Lehmann recalled at the April 2023 shareholders' meeting, after the collapse of his company, that "After the financial crisis we were named the 'Best Bank Globally'. The years since ... that is the bitter reality". Between 2008 and 2023, Credit Suisse's investment banking arm underperformed, dragging down the business's profitability and causing significant losses. The bank suffered from a series of scandals and mismanagement, including losses in its investment arm associated with the collapses of Archegos Capital and Greensill Capital in 2021. Social media rumors about the bank's demise in October 2022 aided billion in outflows from its wealth management business in the last three months of the year. The bank's internal control over financial reporting was flagged by its auditor, PwC, for the period 2020 to 2022.March 2023 United States bank failures and contagion
Following the March 2023 United States bank failures, shares in the global banking sector fell sharply. The S&P Banks index declined 22% over two weeks to 18 March 2023. The U.S. bank failures caused wider concern over pressure on the sector from interest rate hikes by the Federal Reserve and other central banks.Saudi National Bank was Credit Suisse's largest shareholder, with almost 10%. On Wednesday, 15 March 2023, when Bloomberg Television asked SNB chairman Ammar Al Khudairy at a Riyadh conference whether his firm might further invest in Credit Suisse, he replied "The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory", adding:
Bloomberg later wrote "To some Al Khudairy's comment looked like an act of self-sabotage". Although SNB later said that wanting to remain under 10% ownership was its only reason, investors panicked, akin to what happened during the 2010–2011 European debt crisis. Credit Suisse bonds fell by up to 10 cents per euro in the two hours after Al Khudairy's answer, and its stock declined up to 31% that day. Chairman Lehmann, also at the Riyadh conference, quickly returned to Zurich. Credit Suisse executives were aware that they could not control the stock price, but the bonds becoming distressed securities signaled great concern from the firm's investors and counterparties.
At 1pm, the firm decided to buy back bonds, but needed help. Despite the existing post-2008 plan to never again use public funds to save a bank, Swiss authorities decided that they had to do so in order to avoid global panic. That day, Swiss National Bank provided to Credit Suisse a backstop in the form of an emergency line of credit of . Despite this, daily withdrawals of demand deposits totaled over later that same week. One-year credit default swaps for Credit Suisse rose that day from an already alarming 799 bps to 3701 bps, the highest levels for large banks since the 2008 crisis. Market discipline broke down; an investor said that the price was so high that hedging was not possible. Work at Credit Suisse almost stopped, as employees evaded clients' telephone calls and their own staff to avoid questions on the crisis.
Because of public anger at the Swiss authorities' 2008 rescue of UBS with government funding, no such rescue of Credit Suisse was possible. While publicly stating that Credit Suisse was healthy, the purpose of the backstop was to give Swiss National Bank and Swiss Financial Market Supervisory Authority time to find a buyer, not for the firm to save itself. They ordered UBS on Wednesday to plan an acquisition as the only alternative to nationalization of Credit Suisse, and reportedly told Credit Suisse "You will merge with UBS and announce Sunday evening before Asia opens. This is not optional". While UBS executives had feared such an order, and had to obey without fully understanding the rival's financials, they understood that Credit Suisse's collapse threatened Switzerland's financial reputation. Even Swiss diplomats discussed moving funds from the firm. Credit Suisse's one-year CDS price remained at 3468 bps on Thursday, signaling that investors doubted the central bank's reassurances. Regulators from the EU, the United States, the United Kingdom, and Switzerland expected that Credit Suisse would not have been able to open for business on 19 March had it not been bailed out or acquired by another bank. U.S. investment management company BlackRock considered acquiring parts of Credit Suisse, but dropped out on 17 March; Swiss authorities reportedly only wanted a domestic solution for the Swiss bank. The American firm decided that it did not want to anger UBS, among its larger customers.
As of April 2023, Credit Suisse has suffered net withdrawals estimated at CHF171.2 billion since October 2022. It has also been reported that while clients' withdrawals at Credit Suisse amounted to CHF65 billion in the first three month of 2023, UBS saw CHF25 billion in new deposits/inflows. Yet, in a Bloomberg TV interview on December 2, 2022, the Chairman of Credit Suisse said that outflows "basically have stopped".
Negotiations
Negotiations surrounding an acquisition began on 15 March. Swiss authorities asserted that a deal had to be done before 20 March, the following Monday, to help prevent the panic from spreading around the world. Issues discussed during the short negotiation period included UBS not wanting Credit Suisse's unprofitable investment bank, antitrust issues from combining Switzerland's two largest banks, the size of a government backstop, and whether to bypass shareholder votes. Swiss National Bank chairman Thomas Jordan led the negotiation, mostly excluding Credit Suisse management. Centerview Partners and JPMorgan advised the management teams of Credit Suisse and UBS respectively; UBS investment banker Piero Novelli and Morgan Stanley independently advised the respective boards.Angered by their exclusion, Credit Suisse management warned UBS and Swiss authorities that its three largest shareholders—SNB part-owner Public Investment Fund, Olayan Group, and Qatar Investment Authority, together owning a quarter of the company—disliked the deal, noting that the Mideast investors were large clients of both banks. UBS only wanted Credit Suisse if the price was low, and if Swiss authorities indemnified UBS from any Credit Suisse regulatory violations. On the morning of 19 March, UBS made an offer of per share, valuing Credit Suisse at around $1 billion, but the price outraged the Mideast investors. SNB urged Credit Suisse to reject the offer; believing that the price was too low, its board did so. The Mideast investors offered to invest $5 billion, but Swiss authorities told Lehmann that his firm had to sell to UBS. Credit Suisse contacted Deutsche Bank and others, but there was not enough time for another buyer. That afternoon, UBS countered with an offer of per share, valuing Credit Suisse at just over $2 billion. Swiss authorities threatened to remove Credit Suisse's board if it did not accept; UBS agreed to increase its bid with increased Swiss financial support. The final deal to purchase Credit Suisse for CHF 3 billion was accepted by the board of Credit Suisse prior to the opening of Asian financial markets on Monday morning. The acquisition was an all-stock deal, with Credit Suisse shareholders receiving 1 UBS share per 22.48 Credit Suisse shares, equivalent to CHF 0.76 per share. The price was 1% of Credit Suisse's all-time high value in 2007.