Explained: Why did UBS acquire Credit Suisse for nearly $3.25 billion? How does this affect the bank’s future?

Last week, the global banking world was rocked when stocks of Credit Suisse, the 167-year-old institution, fell to record lows and creating panic the world over. The situation led to many wondering if we were seeing the start of a collapse similar to the one in 2008. Now after a turbulent week, Switzerland’s largest bank, UBS, has agreed to buy longtime rival Credit Suisse for about $3.25 billion (Rs 26,805 crore) after emergency talks were held between the two banks and the country’s financial regulators. The Swiss National Bank said the deal was the best way to restore the confidence of financial markets and to manage risks to the economy. All about the historic deal The deal to buy Credit Suisse was pushed forward after the bank, the country’s second-largest bank and one of the 30 global financial institutions considered too big to fail, saw its shares nosedived more than 30 per cent to a record low of 1.55 Swiss francs (Rs 137.7) last Wednesday. The incident led to the institution having to take a loan of nearly $54 billion (Rs 4.4 lakh crore) from the Swiss central bank. However, Credit Suisse in recent years has been hit by several controversies and scandals , affecting its credibility on the global scenario.

As the shares plummeted, analysts and investors increasingly speculated that the Swiss government would force the firm to merge with UBS to avoid chaos and that’s exactly what happened. In a deal struck between the two banks and the Swiss regulators, it was decided that UBS will pay 0.76 of one of its shares for each share of Credit Suisse, valuing it at about 3 billion Swiss francs, or $3.2 billion (Rs 26,410 crore) — a small fraction of its market value as of Friday. Also read: Credit Suisse crisis: Does India have reasons to worry? According to an AFP report, this takeover will not be subjected to a shareholder vote and even the Competition Commission will also have no say in the exceptional merger between the country’s two biggest banks. The Swiss National Bank also agreed to provide financial support to UBS to push the deal through — agreeing to lend up to 100 billion Swiss francs. Moreover, Swiss Financial Market Supervisory Authority (FINMA) also agreed to wipe out $17 billion worth of Credit Suisse’s bonds to facilitate this deal. [caption id=“attachment_12318902” align=“alignnone” width=“640”] A logo of Swiss bank UBS in Zurich, Switzerland. The takeover of Credit Suisse by UBS will create a banking giant. Reuters[/caption] What is interesting is that this deal came after hasty deliberations. It is reported that until the last minute, both sides were unsure that they would be able to even pull off the deal. On Saturday, UBS had offered to buy Credit Suisse for roughly $1 billion. However, that deal was rejected by Credit Suisse’s board with them arguing that its real estate holdings alone were worth around that amount. According to Credit Suisse, the deal is expected to be consummated by end of 2023 if possible and in the meantime, the 167-year-old bank, will implement “its restructuring programme with UBS”. But what does this mean for the customers of the bank? FINMA stated that the services of Credit Suisse would continue without interruption. “This will ensure protection for depositors as accounts, security accounts and other services (counters, ATMs, e-banking, debit and credit cards) will likewise remain accessible as usual,” it said in a statement. The deal marks the end of one banking behemoth and amplifies the strength of another. While Credit Suisse was founded in 1856 and became a giant in Swiss finance, UBS Group AG, formerly known as the Bank in Winterthur, was founded in 1862 and with the passing of years became UBS through mergers. The two institutions became giants in the global banking world, only to be severely impacted in the 2008 financial crisis. UBS rebounded from the crisis, but Credit Suisse struggled, suffering one debacle after another. Significance of the deal The takeover of Credit Suisse by UBS will create a banking giant. As UBS chairman Colm Kelleher said, “The combination of the two banks strengthen UBS’s position as a leading global wealth manager with more than $5 trillion in total invested assets operating in the most attractive growth markets. “It will also reinforce UBS’s position as the leading universal bank in Switzerland and further extend our position as the most important Swiss global bank.” UBS said in a statement: “The combination of the two businesses is expected to generate annual run-rate of cost reductions of more than $8 billion by 2027.” [caption id=“attachment_12318922” align=“alignnone” width=“640”] Axel Lehmann, Chairman Credit Suisse (left), speaks beside Colm Kelleher, Chairman UBS, during a press conference in Bern, Switzerland. AP[/caption] As per the deal, Kelleher and UBS Chief Executive Officer Ralph Hamers will retain their roles in the combined entity. Kelleher further said in the UBS statement, “This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue.” Explaining why the deal was important, Swiss president Alain Berset said, “Credit Suisse’ fate was not only decisive for Switzerland, for our companies, for private clients, for its own employees, but also for the stability of the entire financial system.” Echoing similar sentiments, Finance Minister Karin Keller-Sutter said the bankruptcy of Credit Suisse could have caused “irreparable economic turmoil”. “For this reason, Switzerland has to take responsibility beyond its own borders,” she said. “The UBS takeover of Credit Suisse has laid the foundation for greater stability both in Switzerland and internationally.” Axel Lehmann, chairman of Credit Suisse, described the day as “historic, sad and very challenging” for his bank and the global market. He said in a statement, “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome. “This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.” Also read: As US banking crisis and global recession gain momentum, India provides an exception to the scenario Reactions from global banking systems The deal was welcomed by other banks across the world, with the Bank of England saying it welcomed the “comprehensive set of actions” set out by the Swiss authorities. Christine Lagarde, President of the European Central Bank, said she welcomed the “swift action” of the Swiss authorities. “They are instrumental for restoring orderly market conditions and ensuring financial stability. The euro area banking sector is resilient, with strong capital and liquidity positions.” The US also praised the Swiss central bank for the its swift action with Treasury Secretary Janet Yellen and Federal Reserve Board chairman Jerome Powell both saying the announcement supported “financial stability”. “The capital and liquidity positions of the US banking system are strong, and the US financial system is resilient,” they said. [caption id=“attachment_12318932” align=“alignnone” width=“640”] A view shows a signage of Swiss bank Credit Suisse in front of an office building in Zurich. Credit Suisse in recent years has been hit by several controversies and scandals. Reuters[/caption] The biggest loser It is evident that UBS is the biggest beneficiary of this deal, while Credit Suisse has taken a big tumble. The deal is expected to hit the staff Credit Suisse as Kelleher said in his press conference, “Let me be very specific on this: UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture.” This statement implies there will be job cuts, however, it’s too soon to know a job-cut number. According to a Bloomberg report, the UBS chairman said he understands the coming months will be “difficult” for Credit Suisse staff and promises UBS will do what it can to keep the uncertainty as short as possible. However, what may be more damaging than the job cuts will be to Switzerland’s reputation as a safe place to invest. Despite the many scandals, Swiss banks were known across the world to be strong and reliable. However, a bank with the prominence that Credit Suisse enjoyed to go down under in just a few days will cause a reputational dent to Switzerland. With inputs from agencies Read all the  Latest News ,  Trending News ,  Cricket News ,  Bollywood News , India News  and  Entertainment News  here. Follow us on  Facebook ,  Twitter  and  Instagram .