UBS agrees $3.25bn rescue deal for rival Credit Suisse

UBS agreed to buy Credit Suisse for $3.25bn after a frantic weekend of negotiations brokered by Swiss regulators to safeguard the country’s banking system and attempt to prevent a crisis spreading across global markets.

The historic deal follows five days in which the Swiss establishment raced to end a deepening crisis at Credit Suisse that threatened to topple the country’s second-largest lender.

An emergency SFr50bn ($54bn) credit line provided by the Swiss National Bank on Wednesday failed to arrest a steep decline in the bank’s share price, which was exacerbated by wider market turmoil caused by the sudden collapse earlier this month of California-based Silicon Valley Bank.

“On Friday the liquidity outflows and market volatility showed it was no longer possible to restore market confidence, and a swift and stabilising solution was absolutely necessary,” Swiss president Alain Berset said at a press conference in Bern on Sunday evening. “This solution was the takeover of Credit Suisse by UBS.”

UBS will pay about SFr0.76 a share in its own stock, worth SFr3bn, up from a bid of SFr0.25 earlier on Sunday worth around $1bn that was rejected by the Credit Suisse board. However, the offer remains far below Credit Suisse’s closing price of SFr1.86 on Friday.

As part of the deal, the SNB has agreed to offer a SFr100bn liquidity line backed by a federal default guarantee to UBS, the Swiss finance ministry said. The government is also providing a loss guarantee of up to SFr9bn, but only after UBS has borne the first SFr5bn of losses on certain portfolios of assets.

The combination creates one of the biggest banks in Europe. UBS has $1.1tn of total assets on its balance sheet and Credit Suisse has $575bn.

“This is no bailout. This is a commercial solution,” said Swiss finance minister Karin Keller-Sutter. “The bankruptcy would have had huge collateral damage on the Swiss financial market and with a risk of contagion internationally.

“The US and UK were very grateful for this solution . . . they really feared a bankruptcy of Credit Suisse,” she added.

The takeover means the end for the 167-year-old bank whose headquarters faces its fierce rival UBS across Zurich’s Paradeplatz square.

It caps a calamitous few years for Credit Suisse marked by twin crises linked to specialist finance group Greensill Capital and family office Archegos in 2021 which resulted in billions of dollars of losses and severely damaged the bank’s reputation for risk management.

Under the terms of the deal, some SFr16bn of Credit Suisse’s Additional Tier 1 capital bonds, which are designed to take losses when institutions run into trouble and to transfer the risk of a bank failure from taxpayers to investors, are being wiped out.

Credit Suisse said in its statement on Sunday evening that Swiss market regulator Finma had determined the bonds would “be written off to zero”. Around SFr1bn of other capital was also written off.

UBS also agreed to remove a material adverse change clause present in their initial proposal, which would have allowed them to back out of the takeover if their credit default spreads jumped by 100 basis points or more before the deal closes.

The Swiss federal council — the executive arm of government — will issue an emergency ordnance to waive regulatory and governance hurdles to the swift closing of the transaction. Swiss parliamentarians will also eventually have to approve the process — albeit retrospectively; a vote will be held within the next six months.

Federal Reserve chair Jerome Powell and Janet Yellen, US Treasury secretary, said that they welcomed the move by “Swiss authorities today to support financial stability”. That was echoed by European Central Bank president Christine Lagarde, who said the rescue of Credit Suisse “was instrumental for restoring orderly market conditions and ensuring financial stability”.

The deal came after Credit Suisse chief executive Ulrich Körner had been unable to draw a line under the bank’s crises during his eight-month tenure, with a restructuring plan that included spinning off its investment bank and cutting 9,000 jobs failing to convince investors.

Customers withdrew SFr111bn from the group in the final three months of last year. Deposit outflows from Credit Suisse late last week topped SFr10bn a day, the Financial Times has previously reported.

Shares in Credit Suisse are down more than 74 per cent over the past year, leaving its market capitalisation on Friday at just $8bn, dwarfed by the roughly $57bn market cap of UBS.

In 2022, UBS made $7.6bn of profit while Credit Suisse slumped to a $7.9bn loss, effectively wiping out the entire previous decade’s earnings

For UBS, the deal cements its position as the world’s largest wealth manager, with operations spanning the US, Europe, the Middle East and Asia. The combined entity will have $5tn of invested assets globally.

“UBS will remain rock solid,” said UBS chair Colm Kelleher, who will continue to lead the combined entity with chief executive Ralph Hamers.

Kelleher said that Credit Suisse’s Swiss division was “a fine asset that we are very determined to keep” and that it was too early to give an estimate of job cuts across the various divisions UBS is acquiring.

However, the UBS chair said it “intends to downsize Credit Suisse’s investment banking business” so that it accounts for no more than 25 per cent of the group’s risk weighted assets” and “align it with our conservative risk culture”.

Additionally, a plan to spin off the advisory and capital markets operations with the First Boston brand under the leadership of Michael Klein will be reviewed and could be cancelled, according to a person with knowledge of the plans.

Finma has given UBS the right to block any material changes at Credit Suisse until it is fully in control of its rival.