UBS is offering to buy Credit Suisse for $1 billion as regulators rush to restore confidence in the banking system. Here's how we got here.
AP Photo/Schalk van Zuydam
- UBS offered $1 billion to buy Credit Suisse as regulators rush to restore confidence.
- Credit Suisse has long been a troubled bank, posting billions in losses and deposit outflows.
- Here's a closer look at why regulators are so worried about Credit Suisse.
UBS is offering $1 billion to buy Credit Suisse and prevent the bank's collapse, after shares tumbled to a record low this week and fears mounted over the strength of the global banking system.
The prospective all-share deal, first reported by the Financial Times, is significantly less than the bank's market value of $9.5 billion, effectively leaving investor stakes in the bank near worthless. UBS is reportedly pushing back on the offer, saying it is too low and will hurt shareholders, sources told Bloomberg on Sunday.
The deal between Switzerland's two biggest banks was brokered by the Swiss National Bank and regulators in an effort to shore up confidence for the country's financial institutions, the Financial Times reported on Friday.
According to the outlet, Swiss regulators said a merger between the two banks is their "plan A" leading into markets opening Monday, though it remains uncertain if the deal will go through.
While Bloomberg reported on Saturday that sources say Credit Suisse's investment banking and trading arms are sticking points for the two sides, the FT said Switzerland is preparing to use emergency measures to fast-track the deal and bypass the usual six-week consultation period for shareholders.
Deutsche Bank is also reportedly considering acquiring parts of Credit Suisse, sources close to the matter told Bloomberg on Saturday.
BlackRock had explored making an offer for Credit Suisse, the FT reported on Saturday, but representative told Insider it had "no interest" in acquiring part or all of the bank.
Here's a closer look at the European lender's troubles, and why it's faced doubts about its stability and it looks to reach a deal before markets open Monday.
Why is Credit Suisse under fire right now?
Credit Suisse shares tanked Wednesday after its biggest shareholder, Saudi National Bank, warned it wouldn't be able to invest more cash without raising its stake above the regulatory limit of 10%.
SNB's chair, Ammar al-Khudairy, told Reuters that he doesn't see the Saudi bank's stated lack of support as a problem.
"I don't think they will need extra money; if you look at their ratios, they're fine," he said, referring to standard measures of a bank's financial health.
"We are happy with the plan, the transformation plan that they have put forward. It is a very strong bank," he added, noting Credit Suisse operates under a strong regulatory regime in Switzerland and other countries.
But investors have been showing signs of losing faith in Credit Suisse long before the Saudi comments, and before the SVB collapse rattled the entire banking industry.
Harris Associates, Credit Suisse's No. 1 investor as recently as last year, exited its entire stake in the embattled Swiss bank over the past few months. The Chicago-based investment management firm owned about 10% of the Swiss bank's stock as of August last year, but slashed its exposure to 5% in January. More recently, Harris reportedly cut its holdings in the lender to zero.
"There is a question about the future of the franchise. There have been large outflows from wealth management," David Herro, Harris Associates' deputy chairman and chief investment officer, was cited by the Financial Times as saying, in a March 5 report.
And Credit Suisse has faced a slew of other recent challenges. The bank revealed in its latest annual report that it found "material weaknesses" in its internal control over its financial reporting. Moreover, it delayed publishing that annual report after the Securities and Exchange Commission inquired about the lender's revisions to cash flow statements dating back to 2019.
Credit Suisse also suffered a net loss of about $8 billion last year, as its net revenues tanked by more than a third.
Moreover, it has seen a sharp increase in outflows over the past few months, driving it to tap its "liquidity buffers" — liquid assets such as central-bank reserves and high-quality government debt.
Here's a quick summary of the controversies that have plagued Credit Suisse in recent years:
- The bank hired private detectives to spy on former executives, leading to the departure of its CEO in February 2020.
- It lost nearly $6 billion in March 2021 after Archeges Capital Management imploded and defaulted on its loans from the Swiss lender.
- It's still working to recover about $2 billion of the roughly $10 billion it had tied up in supply chain finance funds linked to Greensill, which collapsed amid allegations of fraud in March 2021.
- It was fined for making fraudulent loans dubbed "tuna bonds" to Mozambique's government between 2012 and 2016.
- Its chairman was forced to resign in January after an internal investigation found he violated COVID-19 quarantine rules to attend Wimbledon.
- Credit Suisse's previous CEO resigned for personal and health reasons last July.
Is a banking crisis brewing?
The race to put together a deal to acquire Credit Suisse follow recent events in the US banking industry.
Silvergate, a key lender to the cryptocurrency industry, announced it was winding down its operations and liquidating its assets last Wednesday.
Silicon Valley Bank, a major player in the venture-capital ecosystem, was overwhelmed by a wave of withdrawals and taken over by the Federal Deposit Insurance Corporation (FDIC) on March 10.
The FDIC revealed on March 12 it had taken control of Signature Bank as well. Moreover, it announced that under a "systemic risk exception," it would fully guarantee both banks' deposits, beyond the usual limit of $250,000 per account.
And First Republic Bank has also been trying to stave off concerns about its financial position, with 11 banks depositing $30 billion in the bank to help shore up its liquidity. Still, the New York Times reported on Friday that First Republic was looking to raise fresh capital.
SVB ran into trouble because it invested some of its clients' deposits in long-dated bonds. Those plunged in price as the Federal Reserve hiked interest rates from nearly zero to upwards of 4.5% over the past 12 months in response to inflation hitting 40-year highs.
The lender sold its bond portfolio at a nearly $2 billion loss last week, and launched a capital raise to reinforce its finances. Its scramble for cash stoked concerns about SVB's stability among VCs and their portfolio companies, sparking a wave of withdrawals that overwhelmed the bank and spurred the FDIC to intervene.
SVB's collapse fueled worries that other banks are carrying heavy losses on their bond portfolios, as rates have jumped in both the US and Europe.
It also put a focus on bank liquidity, with consumers and companies shifting their deposits from weaker banks to the strongest and largest institutions.
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