Credit Suisse Rescued in Deal with UBS

•Oil prices continue fall amid concerns of banking crisis

Emmanuel Addeh in Abuja with agency report

Credit Suisse shares plunged yesterday, after Swiss authorities cut a deal with its bigger rival, UBS, to acquire the troubled bank at a marked-down price.

But European bank stocks and the wider market gained as investors watch whether moves to shore up banks will stem further upheaval in the global financial system, according to the Associated Press.

Shares of Credit Suisse, whose woes stem from questions over its internal controls, closed nearly 56 per cent lower a day after UBS said it would buy its fellow Swiss bank for a lowball price of 3 billion Swiss francs ($3.25 billion). The shares traded at about the level they are valued at in the deal.

Swiss regulators orchestrated the purchase in a bid to stop more turmoil after the collapse of two United States banks. In an indication of the frantic, behind-the-scenes deal-making to resolve the issue before markets opened, the acquisition was announced late Sunday.

There was still uncertainty over how the deal would play out for the combined lender and what comes next for the wider banking system. Analysts said some previous forced bank mergers didn’t work out well for shareholders in the long run.

It could be that no more banks get into trouble, but it’s also possible that “we just go from one weak institution falling over to the next,” senior economic adviser at Capital Economics, Vicky Redwood said.

There are no other obvious candidates that could be singled out like Credit Suisse, but it’s “hard to predict where the problems will emerge,” she said.

UBS shares initially dropped on the Swiss stock exchange but closed up 1.3 per cent. The deal whipsawed other European bank stocks, which tumbled before some clawed back their losses. Germany’s Deutsche Bank, France’s BNP Paribas and Italy’s UniCredit ended higher, while London-based Barclays sank 2.3 per cent.

Swiss authorities urged UBS to take over its smaller rival after a central bank plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) last week failed to reassure investors and customers.

Many of Credit Suisse’s problems were unique and unlike the weaknesses that brought down Silicon Valley Bank and Signature Bank in the U.S., including high interest rates. Those US failures have raised questions about other potentially weak global financial institutions, sweeping up the already beleaguered Swiss bank.

Credit Suisse has faced an array of troubles in recent years, including bad bets on hedge funds, repeated shakeups of its top management and a spying scandal involving UBS.

Analysts and financial leaders said safeguards are stronger since the 2008 global financial crisis and that banks worldwide have plenty of available cash and support from central banks. But concerns about risks to the deal, losses for some investors and Credit Suisse’s falling market value could renew fears about the health of banks.

An economic history professor at University of Zurich, Tobias Straumann, said the merger was the right move because the U.S. bank collapses and the danger to Credit Suisse was “an international banking crisis in the making.”

“Markets are very nervous, and I think an additional accident in Switzerland would have fueled a lot of problems,” he said.

Credit Suisse is among 30 financial institutions known as globally systemically important banks, and authorities were worried about the fallout if it were to fail.

UBS is bigger but Credit Suisse wields considerable influence, with $1.4 trillion assets under management. It has significant trading desks around the world, caters to the rich through its wealth management business, and is a major mergers and acquisitions adviser. However, Credit Suisse weathered the 2008 financial crisis without assistance, unlike UBS.

As part of the deal, approximately 16 billion francs ($17.3 billion) in higher-risk Credit Suisse bonds will be wiped out, leaving investors with hefty losses. Lawyers were already circling, eyeing possible legal action to get compensation for bondholders amid concern about the market for those bonds and other banks that hold them.

The combination of the two Swiss banks, each with histories dating to the mid-19th century, strikes at the country’s reputation as a global financial center — putting it on the cusp of having a single big national bank that would be too big to fail.

Some customers were caught off guard by the turmoil, at odds with Switzerland’s reputation as stable banking haven.

Sahil Dua, an Indian software engineer living in Zurich, holds a UBS account but opened one at Credit Suisse last Tuesday, the same day the lender flagged “material weaknesses” in internal financial controls that ultimately helped spark its downward spiral.

“My impression as a customer,” Dua said, is “that at least these two banks were going to be fine, whatever happens.”

Dua said he wanted the credit card that came with the Credit Suisse account and that he considered switching over his primary bank account and bringing his savings from UBS. Not anymore.

He has a Credit Suisse account “with a balance of zero, and I’m glad that it’s still zero because I didn’t add any money yet to it.” In the future, he plans to spread out his money in more than one bank.

“I will look into diversification more seriously now,” Dua said.

As the market tries to figure out what comes next after the merger, Straumann, the professor, said he wouldn’t be surprised to see problems for regional banks in Europe after further interest rate increases, much like what happened with midsized banks in U.S.

“The banking system of Europe has not fully recovered from the crisis” in 2008, he said. “It’s better, of course, than it used to be, but it’s vulnerable.”

Meanwhile, prices of crude oil continued to fall yesterday, amid concerns over recent crisis in major banks in the United States. Brent crude, Nigeria’s benchmark was trading at $72. 63 per barrel, while West Texas Intermediate was changing hands for $66.49 per barrel yesterday evening.

The weak start of the new trading week came after the worst week for oil since the start of the year, with prices sinking to the lowest in 15 months following the news of the demise of Silicon Valley Bank and Signature Bank in the United States.

Although central banks have managed to calm the worst of the fear, assuring that a meltdown is far-fetched, however investors have continued to express concerns, suggesting that efforts to convince the public that all will be well remain doubtful.

Meanwhile, analysts at Goldman Sachs have downgraded their earlier view of oil prices. In a note, the analysts said that oil prices will not jump to $100 this year as earlier projected.

Instead, their estimate, for now, is that prices could jump to about $94.50, which is more than 35 per cent above the current level.

Goldman Sachs attributed the new downgrade to the ongoing banking crisis, which will lead to a hard landing in the global economy.

“Oil prices have plunged despite the China demand boom given banking stress, recession fears, and an exodus of investor flows. Historically, after such scarring events, positioning and prices recover only gradually, especially long-dated prices,” Goldman stated.

Oil demand from China has been growing since the country ended its Covid-zero strategy. Most of this oil is coming from Russia, Middle East, and the United States. Analysts believe that China’s demand will remain elevated in the coming months. Brent crude oil price had slumped even as the dollar has lost its shine.