UBS Buys Credit Suisse, Rapid Fire Sale on the SMI

Swiss banking giant UBS has bought Credit Suisse (CS), the country’s second-largest bank, for US$3.2bn in an all-share transaction as global markets get the jitters over bank solvency. In the deal sealed on Sunday, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares. At the same time, the Swiss National Bank will lend up to 100bn francs to UBS to support the deal. The Swiss financial regulator, Finma, has enforced the cancellation of US$17bn worth of higher-risk Credit Suisse's bonds and eliminated the need for shareholder approval.  As a result, Saudi National Bank (SNB) confirmed that it has suffered a loss of around 80% on its investment in Credit Suisse. SNB had purchased Credit Suisse stock for 3.82 Swiss francs per share. Following the deal, shareholders of Credit Suisse including SNB will receive 0.76 Swiss francs from UBS, this corresponds to only a fraction of the US$8.5bn market capitalization as of Friday. Analysts say this is a reflection of how distressed Credit Swiss had become. 

CS had over the last week suffered significant losses and mass outflows, leading to record lows in its market equity valuation. A panicky Wall Street had been shorted bank stocks and there were fears of another global liquidity run. Financial observers believe that more problems may emerge at other commercial banks, but the industry does not have disturbingly high uninsured deposits or unrealized losses on "held-to-maturity" securities above the size of capital. Following years of mismanagement and scandal-ridden headlines, the storied 167-year-old European lender has been haunted by a crisis in the banking sector in the wake of Silicon Valley Bank's failure (see chart 1 below).

Chart 1: 

Interest Rate Hikes and a Seeming Early Day Blood Bath on the SMI

Aggressive central bank action to arrest persistent inflation has shaken investor confidence, with financial institutions caught in the crosshairs. The merger between UBS and CS is the latest attempt to arrest market volatility triggered by concerns about a worldwide bank illiquidity contagion. The acquisition of Credit Suisse by UBS was supervised by Swiss financial system regulators, from whom UBS got US$6bn in guarantees to execute a deal. While the Swiss National Bank (SNB) had expressed readiness to open a monetary tap for Credit Suisse to support additional liquidity, the European Central Bank (ECB) decision to raise rates further spurred a financial sector sell-off on the Swiss Market Index.

Expectations of a 25bp rate hike by the American Federal Open Market Committee (FOMC) in its meeting this week supported large selloffs in the Swiss Market Index (SMI).

The Bid to Restore Stability

The acquisition of Credit Suisse by UBS involves 3bn Swiss francs (US$3.23bn) and US$5.4bn in losses. The Swiss government has backed the deal in which it would provide a loan of 100bn Swiss francs (US$108bn) to UBS to boost liquidity. CNBC data suggests that the market responded negatively to the deal as both banks led losses on the pan-European Stoxx 600 index. The takeover agreement states that Credit Suisse (CS) shareholders will get one UBS share for every 22.48 CS shares they own. The two titans handle approximately US$5 trillion in assets, which accounts for almost 140% of the Swiss GDP. While fears of a worldwide financial contagion persist, closing the merger was vital to strengthening the stability of the Swiss financial system.

Monetary regulators in Asia and Australia where CS has a strong presence have released statements reinforcing the stability and resilience of their domestic banking systems. This major deal brings up anti-competition concerns because regulators have essentially combined two major market participants. This breeds concerns for other financial systems like in Nigeria where analysts have raised concerns questioning the stability of the heavily regulated banking system. 

ALM Palaver

The SVB trouble was worsened by the mismatch of assets and liabilities. While the bank had a large deposit base it did not have the top-quality loan assets needed to create a loan-to-deposit ratio that would ensure fiscal sustainability. The bank invested a large bite of its deposits in startup equity or debt. The mismatch kicked into the lender’s gut as it had to pay interest on deposits without the matching interest inflows from loans and advances.

The SVB problem is not unique, several Nigerian banks have the same financial statement position as SVB, even if on a smaller scale. The SVB implosion should serve as a red flag to Nigerian lenders that have gobbled up short-dated treasury instruments like bears to honey. Admittedly, by staying at the short end of the treasury bill market Nigerian lenders have remained liquid, but being overweight in treasuries can lead to asset overconcentration and portfolio management indigestion. As getting big on oats does not guarantee healthiness, becoming oversized on short-dated government instruments could be just as harmful to banks.

Nigerian banks appear to have dodged a liquidity bullet in  Q1 2023, but for how long is anybody’s guess, and may depend on how well the banks keep a close watch over their asset and liability management (ALM). Suggested readings from Nigeria’s top-tier banks which include the FUGAZE, are not bad but do not deserve a pop of champagne.