Investors punish UBS after Credit Suisse rescue, shares plummet

© Reuters. FILE PHOTO: A view of the Credit Suisse building at Circular Quay in Sydney, Australia, March 20, 2023. REUTERS/Jaimi Joy

By John Revill Amanda Cooper

LONDON/ZURICH (Reuters) -Shares in UBS plunged on Monday, heading for their biggest one-day fall since 2008 after its weekend rescue of ailing rival Credit Suisse ignited concerns among investors about the long-term benefits of the deal.

UBS, with a hefty backstop from Swiss authorities, agreed to buy Credit Suisse on Sunday for just a fraction of its market value in a package orchestrated by Swiss regulators.

The bank will pay 3 billion Swiss francs ($3.23 billion) for Credit Suisse and assume up to $5.4 billion in losses.

Shares in UBS fell by as much as 16% in early trading, the most since September 2008. They were last down 15% at 14.47 francs. Since the start of March alone, they've lost almost 30% in value, set for their largest monthly loss since September 1998.

Johann Scholtz, analyst at Morningstar, said the acquisition should ultimately benefit UBS.

"A week can be a very long time in financial markets. UBS acquiring Credit Suisse for 3 billion francs a week ago would have seemed like a terrific deal. Now the position is less clear," he said.

"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," Scholtz added.

Credit Suisse shares slid by more than 60% to around 0.69 Swiss francs ($0.7417), while the value of its additional tier 1 (AT1) bonds - a type of bond issued by banks that make up the capital buffers regulators require them to hold - dropped as low as 1 cent on the dollar.

The Swiss regulator demanded Credit Suisse write down 16 billion Swiss francs worth of the debt to zero as part of the merger deal, angering bondholders.

A $1 billion AT1 bond with a coupon of 4.5% was bid as low as 1 cent on the dollar, Tradeweb pricing showed.

"The next few hours of trading will give us a better picture on whether the crisis is contained," Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said.

"In theory, there is no reason for the Credit Suisse crisis to extend, as what triggered the last quake for Credit Suisse was a confidence crisis – which doesn't concern UBS - a bank outside of the turmoil, with, in addition, ample liquidity and guarantee from the SNB (Swiss National Bank) and the government."

At Friday's close, Credit Suisse had a total market value of $8 billion. Just six months ago, it was worth $13 billion.

JPMorgan (NYSE:JPM) said that although UBS stood to gain in the longer-term from the deal, the writedown of the AT1 bonds would impact other European banks.

"We believe this AT1 write-down by a systemically important bank will have negative implications for the wider European Banks’ AT1 market as well as overall funding profile and Cost of Equity for the Banks," JPMorgan strategists Kian Abouhossein and Amit Ranjan said in a note on Monday.

An index of European banking shares tanked on Monday, losing more than 4% as shares in the likes of Deutsche Bank (ETR:DBKGn), Commerzbank (ETR:CBKG), Societe Generale (OTC:SCGLY) and BNP Paribas (OTC:BNPQY) dropped between 5.5-7.5%.

($1 = 0.9303 Swiss francs)