Friday 31 March 2023

UBS Has a Good Deal!

The demise of banking giant Credit Suisse sent shock waves through financial markets and appears to have dealt a blow to Switzerland's reputation for stability. UBS, Switzerland's largest bank, agreed on Sunday to buy its embattled domestic rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) as part of a government-backed, cut-price deal.

Swiss authorities and regulators helped to negotiate the agreement, which came amid fears of contagion to the global banking system after two smaller U.S. banks collapsed in recent weeks.


Source: https://ms.wikipedia.org


The rescue deal means Switzerland, a country heavily dependent on finance for its economy, is on track to see its two biggest and best-known banks merge into just one financial giant.
Under the terms of the emergency takeover, investors in Credit Suisse's additional tier-one bonds — widely regarded as a relatively risky investment — will see the value of their holdings slashed to zero. It means investments worth roughly 16 billion francs will become worthless. AT1 bonds, also known as contingent convertibles or "CoCos" are a type of debt that is considered part of a bank's regulatory capital. Holders can convert them into equity or write them down in certain situations – for example when a bank's capital ratio falls below a previously agreed threshold. The unconventional move is at odds with the typical practice of prioritizing bondholders over shareholders when a bank fails and prompted turmoil in the market for convertible bank bonds on 20 March 2023.

Saudi National Bank, the largest shareholder of Credit Suisse, has lost around 80 per cent of its investment. Credit Suisse, which failed over the weekend. Riyadh-based Saudi National Bank has a 9.9 per cent stake in the Swiss bank. It invested 1.4 billion Swiss francs ($1.5 billion) in November 2022 at 3.82 francs per piece. 

The Qatar Investment Authority, Credit Suisse’s second-largest investor, holds a 6.8 per cent stake in the bank, but it hasn’t disclosed about its losses. Credit Suisse had been facing a number of problems and was trying to overcome the multi-dollar losses, but failed to win back investors’ confidence.   

In December 2022, Credit Suisse raised $4 billion in funding from investors, including major Gulf banks and sovereign wealth funds like Saudi National Bank, the Qatar Investment Authority and the Saudi Olayan Group.  Norway’s sovereign wealth fund, Norges Bank Investment Management, is also a major shareholder in the embattled bank. 

After years of administration struggles, heavy losses and scandals, Credit Suisse’s recent share price plunge started with the collapse of Silicon Valley Bank and Signature Bank earlier this month.  
It aggravated when the Saudi National Bank on Wednesday said it could not provide any more financial assistance.  This led to a rout in banking stocks, which promoted governments to float rescue plans to keep banks functioning amid market volatility. 
The 167-year-old Swiss bank stands out as the biggest loser from Sunday's rescue deal.
The onetime banking titan has been forced by its own government to accept a takeover bid from its biggest rival, which values it at less than half its market capitalization.

UBS, on the other hand, will see its assets under management swell to just under $2 trillion if it can complete the deal, according to data from S&P Global – which is more than the amounts managed by blue-chip US rivals like Goldman Sachs and Morgan Stanley.

What a tragedy! A once respected institution has fallen from grace! Banks have to remain conservative to survive long periods. The case for us will be Bank Bumiputra. Prudence, circumspect and boring are qualities for commercial banks. If not, you will need rescue from shareholders, a “white” knight or the Government.

References:
‘A financial banana republic’: UBS-Credit Suisse deals put Switerland’s reputation on the line, Sam Meredith, CNBC, 21 Mar 2023

Credit Suisse takeover by UBS: Saudi National Bank loses over $1 bn on its investment, says report, Basudha Das, www.businesstoday.in, updated 21 Mar 2023

Credit Suisse rescue: The biggest winners and losers from UBS’s historic deal, George Glover, Markets Insider, 20 Mar 2023

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