UBS’s shotgun deal for ailing Credit Suisse (CS) doesn’t guarantee market stability, warns one top strategist.
“The outcome for equity-holders may also worry investors in other weak banks, particularly but not only in Europe. If this makes it harder to raise equity capital it could have downsides for stability,” said EvercoreISI strategist Krishna Guhu.
Added Guhu: “Market focus will likely broaden out to other weaker European banks as well as U.S. regional banks.”
After much speculation and with markets on the cusp of a Monday morning panic at the hands of a rolling bank crisis, UBS (UBS) made its play for its stricken long-time Swiss rival.
Here are the UBS-Credit Suisse deal details:
Purchase Price: More than $3 billion
Who Will Run the Combined Entity: UBS chair Colm Kelleher and UBS CEO Ralph Hamers
Other: UBS sees the deal accretive to EPS by 2027; Credit Suisse investment bank will be wound down; Total annualized cost savings of $8 billion by 2027; Both banks have unrestricted access to the Swiss National Bank existing facilities; UBS will suspend its stock buyback plan; Integration will take three to four years.
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” UBS chair Colm Kelleher said in a statement, taking a not-too-thinly-veiled shot at the Credit Suisse board and executive team.
“It’s a historic day, and a day we hoped would not come,” Kelleher added on an analyst call that included UBS CEO Hamers. Credit Suisse executives or board members were not on the call.
UBS execs added on the call they would move “fast” to wind down Credit Suisse’s investment bank. The company said it had taken reserves against Credit Suisse’s high-profile litigation matters.
EvercoreISI’s Guhu said investors must remain vigilant.
“The agreement – which should achieve its goal of stabilizing Credit Suisse – is strongly positive for stability and global markets relative to a no-deal scenario. But the decision to completely write down CHF 15.8bn in CS AT1 debt – which we warned last week could be at risk to enable SNB funding on the scale required – risks spreading contagion through the European banking system via repricing of bail-in debt and equity at other banks,” Guhu said.
Cautious optimism was also echoed by Jefferies EU banking team.
“In terms of sector ramifications, while this deal significantly reduces the immediate systemic risk from CS’ weaknesses, we think two key negatives elements will also catch the eye: (1) that CS’ AT1 holders are wiped out whereas shareholders are not entirely, though normally more junior in creditworthiness, and (2) that shareholder approval was not asked on UBS’ side for this deal,” explained the Jefferies team in a late Sunday client note.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email [email protected]
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