UBS/Credit Suisse Update

Bank Crisis

MFS Investment Management provides an update on the takeover of Credit Suisse by UBS and implications for markets.

UBS agreed to buy Credit Suisse (CS) over the weekend due to mounting financial stability risks affecting the global financial system. The weekend deal was engineered by the Swiss authorities. Overall, we believe that the authorities’ response has been satisfactory. Besides the forced merger, two other potential scenarios were the full nationalization of CS or a wait-and-see approach that may have resulted in a possible bankruptcy of a globally systemically important bank. In our view, the merger strikes us as the most market-friendly outcome. The broad details of the transaction are as follows: UBS buys CS for $3.25bn in an all-share deal, paying about CHF0.76 a share in stock, well below the CS closing price of CHF1.86 on Friday.


As part of the deal, the Swiss authorities have agreed to extend substantial liquidity support to UBS, including a CHF100bn liquidity line backed by a federal default guarantee. The Swiss government is also providing a loss guarantee of up to CHF9bn, but only after UBS has borne the first CHF5bn of losses on certain portfolios of assets. This is a significant buffer, in our view, which should ultimately help contain contagion risks.


The most controversial part of the rescue package was the treatment of AT1s, the Additional Tier 1 Capital bonds, which have been fully written off as part of a permanent write-down. In an apparent breach to conventional market wisdom, AT1s were not treated as senior to equity. This triggered a major correction in the regional AT1 market for European banks, with investors having to reconsider the appeal of the near $250 billion asset class. European regulators (Switzerland is not a member of the EU) have tried to assuage concerns, reaffirming that AT1 bonds offer more protection than equities in the EU. 


Troubles at Credit Suisse have been well publicized in recent years including several risk management mis-steps such as their involvement in the Greensill and Archegos scandals, accusations of corruption and a spying scandal. To address these issues, the firm has engaged in an ongoing strategic plan which include a restructuring of the investment banking arm, tighter risk management controls and a new executive board. However, progress on a turnaround has been slow and financial results, weak, leading to waning investor confidence. In the latest blow, recently material weaknesses in their risk management processes around material misstatements in their financial statements were identified, causing a delay in their 2022 annual report.


While the weekend developments were met with significant market volatility in fixed income and risky assets at the Monday open, global markets now seem to have found their footing. In particular, US Treasury yields are now higher on the day, after a sharp decline during Asian and European sessions. Elevated financial stability risks cast a shadow on this week’s FOMC meeting. Indeed, some market participants believe that the Fed will be forced to halt rate hikes due to rising bank stress. Others are of the view that the Fed will deliver a dovish hike, whereby a 25bp rate increase will be associated with signals that the tightening cycle is near completion. On Sunday, the Fed announced coordination with several other central banks to extend US dollar swap lines in an effort to ease global funding markets.


Overall, we believe that the authorities’ response to the financial sector turbulence has been credible but restoring market confidence may require more work regarding communication and potential liquidity support, especially if the contagion risks do not dissipate. 


Please contact your MFS relationship manager for portfolio specific exposures to UBS and Credit Suisse.

The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. No forecasts can be guaranteed.


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