UBS has shared reverse losses; Credit Suisse has created 55% after the confiscation deal

March 21, 2023: On Monday, UBS shares staged a remarkable rally, reversing steep losses following the bank’s 3 billion Swiss francs “emergency rescue” of embattled domestic rival Credit Suisse.

Shares of UBS are closing 1.2% higher, recovering from losses of more than 14% at one point in the session. Credit Suisse, meanwhile, completed more than 55% lower.

Europe’s banking index increased 1.2% by the end of the session, which occupied earlier losses as a sense of calm appeared to come back to markets.

The volatility comes after UBS agreed to buy Credit Suisse as a part of a cut-price deal to stem the global banking system’s contagion risk.

On Sunday, Swiss authorities and regulators helped to facilitate the deal, announced as Credit Suisse teetered on the brink.

The size of Credit Suisse was an issue for the banking system, as was its international footprint, given its many international subsidiaries. The 167-year-old bank’s balance sheet was around twice the size of Lehman Brothers when it was no more, at about 530 billion Swiss francs at the end of the previous year.

The combined bank will be a huge lender, with over $5 trillion in total invested assets and “sustainable value opportunities,” UBS said in a release on Sunday.

The bank’s chairman, Colm Kelleher, stated that the acquisition was “attractive” for UBS shareholders but explained that “as far as Credit Suisse is concerned, this is an emergency rescue.”

“We have structured a transaction preserving the value left in the business while limiting our downside exposure,” he further stated.

“Acquiring Credit Suisse’s wealth, asset management and Swiss universal banking capabilities will augment UBS’s strategy of growing its capital-light businesses.”

Neil Shearing, the chief group economist at Capital Economics, stated a complete takeover of Credit Suisse may have been the right way to end doubts regarding its viability as a business, but the “devil will be available in the details” of the UBS buyout deal.

“One issue is that the reported cost of $3,25bn (CHF0.5 per share) is equal to ~4% of book value and regarding 10% of Credit Suisse’s market value at the beginning of the year,” he highlighted in a note on Monday.

“This states that a substantial part of Credit Suisse’s $570bn assets may be impaired or perceived as at risk of becoming impaired. This could set in train renewed jitters regarding the health of banks.”