In a transaction arranged by Swiss authorities to rebuild confidence in the banking sector, UBS (UBS -5.50% decrease; red down-pointing triangle Group AG) has proposed to purchase competitor Credit Suisse CS -6.94% decrease; red down indicating triangle for around $1 billion.
One choice, according to the sources, would be to acquire Credit Suisse in its entirety before spinning off its local Swiss businesses into a separate company. Credit Suisse's lucrative wealth management division would remain with UBS.
While UBS and Swiss regulators work out the specifics of the proposal and the extent to which Swiss authorities would offer guarantees or backstops, the deal's parameters may yet alter.
Before Asian markets open, officials are rushing to complete the transaction, according to the sources. To speed up the transaction, regulators have reportedly offered to forgo a requirement for typical shareholder votes, according to one of the persons.
What cost savings UBS would be permitted by Swiss regulators to achieve through actions like job cutbacks is a topic of debate, according to the sources. This is important since it will determine how much UBS can pay for the purchase.
Only those components of Credit Suisse's investment bank that fill in regional or product-related gaps where UBS is absent would be retained by UBS.
As compared to Credit Suisse's market value, which closed Friday at around $8 billion, the price would be markedly below that amount. UBS would be responsible for significant, unforeseen expenses and the difficulties of integration. After a merger, some wealthy clients who have accounts at both banks may want to transfer some of their funds to unaffiliated third parties for diversification.
The Financial Times previously reported on the extent of UBS's bid.
According to several of the persons acquainted with the situation, Credit Suisse's AT1 notes are anticipated to undergo a significant write-down, easing some of the financial load UBS would otherwise have to shoulder.
One of the biggest events in the banking industry since the 2008 financial crisis would be the termination of Credit Suisse's almost 167-year reign. The abrupt collapse of Silicon Valley Bank earlier this month unleashed a storm in finance that would take on a new, global dimension.
Last week, as worries about its prospects increased, Credit Suisse took a liquidity lifeline of more than $50 billion from the Swiss National Bank. The central bank and Switzerland's top financial regulator have been forced to organize negotiations with Credit Suisse's larger rival, UBS because the measures taken were insufficient to halt the decline in Credit Suisse's shares or stop the loss of bank deposits.
According to one of the sources, the authorities' eagerness was spurred by an increasingly bleak picture at Credit Suisse. According to one source, the bank experienced up to $10 billion in withdrawals every day last week. The regulators were anxious that if the bank was not handled with, it would become bankrupt next week, and that falling confidence would spread to other institutions.
UBS has long been considered a component of any state-backed solution for Credit Suisse, which has a balance sheet nearly half the size of UBS's total assets of $1.1 trillion. Any full-scale buyout would offer UBS valued businesses within Credit Suisse, such as wealth-management customers in Asia and the Middle East, but it would also bring with it less desired operations, such as Credit Suisse's struggling investment bank. It might also jeopardize UBS's current strategy and investor perception of stability.
According to FactSet, UBS has a market capitalization of around $65 billion, whereas Credit Suisse has a market capitalization of $8 billion. In 2022, it had a $7.6 billion net profit, while Credit Suisse lost $7.9 billion.
According to experts, Credit Suisse's local retail bank, which has been a sticking point in the discussions, may be worth $10 billion on its own. If it merged with UBS, it would become a domestic banking giant with around 30% of the country's domestic loans and deposits.
According to one of the sources, Credit Suisse's enormous legal expenses are anticipated to be backed by the Swiss government and transferred to a separate corporation.
The bank's legal expenditures have risen dramatically in recent years as a result of banker misbehavior and regulatory settlements. It predicted in February that it may have to pay up to an additional $1.3 billion that had not been accounted for. It also faces additional lawsuits, such as those involving investment vehicles it managed with defunct financing partner Greensill Capital.
Another dilemma is what to do with Credit Suisse's bankrupt investment division. Credit Suisse was in the process of spinning off elements of its investment bank, CS First Boston, supervised by former Credit Suisse board member Michael Klein. It agreed to acquire his firm, the Klein Group, for $175 million.
According to persons familiar with the situation, outside investors have begun to firm up their potential financial commitments to the CS First Boston endeavor in recent weeks. Swiss officials are concerned that the proposal is too intricate to be included in the merger, and some potential investors in CS First Boston are hesitant to make any commitments, according to the individuals.
Credit Suisse and UBS are both considered systemically important in Switzerland and worldwide, and a merger might result in extra monitoring and capital requirements. By the end of 2022, Credit Suisse had around 50,000 workers, including over 16,000 in Switzerland. It includes investment banking offices in New York, London, and Singapore, as well as an operations base near Raleigh, North Carolina, and employs hundreds in technology in India and Poland. UBS employs around 74,000 people worldwide.
Any merger would almost certainly result in significant job losses in addition to the more than 9,000 positions already slated to be eliminated as part of Credit Suisse's recovery strategy.
According to its financial documents, Credit Suisse has billions of dollars in delayed employee remuneration and potential lawsuit settlements. It established a capital-release unit in January, which it predicted would take years to complete.
Credit Suisse's move for governmental help comes after other banks and other investors backed away from doing business with the Swiss institution last week. Several investment businesses halted trading with the bank in the fall as its long-standing troubles worsened, according to people familiar with the situation.
Experts have been concerned about wealthy clients withdrawing their funds. Several bank executives reported inflows from Credit Suisse clients last week.
The impact of a deal on broader financial markets will be determined by the specifics and the level of assistance provided by authorities if any. Credit Suisse owes more than $160 billion in long-term debt, part of which is designated as bail-in instruments and might be wiped out if authorities force the bank into a reorganization.
Using UBS to preserve Credit Suisse is a 180-degree shift from nearly 15 years ago when Switzerland bailed out UBS after it was saddled with billions of dollars in toxic assets in its U.S. business. Credit Suisse turned down governmental help at the time and emerged from the crisis stronger.
It was then pummeled by stronger financial regulation and expensive regulatory settlements. The bank was restructured several times. Credit Suisse's new management team, which included several former UBS employees, had requested additional time to demonstrate their ability to turn things around.
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