Monday Market Minutes: Degrees of Magnitude
PUBLISHED
2023-03-19
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UBS is in discussions to take over all or part of Credit Suisse, with the boards of Switzerland’s two biggest lenders set to meet separately over the weekend to consider finalising the deal.
Media reports at the weekend confirmed the news, with the possible takeover to be nailed down before trading resumes in Asia, led by the Australian and NZ markets this morning.
Regardless of what’s agreed, the news will make for a very unsteady start to trading today on the ASX and then Asia.
The Financial Times broke the story and commented that if it happens, the takeover would be "Europe’s most consequential banking combination since the financial crisis.”
Reuters followed with a report of its own which suggested that UBS was coming under pressure from the Swiss authorities to carry out a takeover.
Under the plan, Credit Suisse's Swiss business could be spun off for competition reasons.
Regulators have urged Credit Suisse Group to pursue a deal with Swiss rival UBS as the troubled bank began a make-or-break weekend after some rivals grew cautious in their dealings with it.
Credit Suisse has been seeing an outflow of more than 10 billion Swiss francs a day.
Bloomberg separately reported that the future ownership of Credit Suisse’s troubled investment bank was the biggest sticking point to a deal being done.
Bloomberg also reported that Warren Buffett had ‘reached’ out to US authorities, but there were no details.
Buffett already is indirectly involved - Berkshire Hathaway is the largest shareholder in Bank of America which in turn is (temporarily) leading the $US30 billion bailout for troubled First Republic Bank with a $US5 billion deposit.
Reuters says UBS wants at least $US6 billion in guarantees from Swiss authorities to buy dodgy parts of Credit Suisse.
The talks may go past the opening in Asia on Monday because of their complexity, Reuters and other media reported.
News of the takeover talks came three days after Credit Suisse’s $A54 billion bailout by the Swiss National Bank (SNB), which also involved the bank spending $US5 billion on buying back a cross-section of its bonds to prevent losses on those securities from pressuring the bank.
UBS’s buyout would in effect supplant the Swiss bailout, but would get support from the SNB and other regulators.
The move, if it's completed, will put pressure on US regulators and banks to force the troubled First Republic Bank into the arms of a larger rival rather than let it bleed in public.
First Republic shares lost almost 33% in value on Friday (taking the loss for the week to a nasty 72%) and came after 11 other banks pledged to deposit $US30 billion in the troubled bank for at least 120 days in a coordinated rescue attempt meant to instil confidence.
There are continuing concerns that the infusion may not be enough to shore up First Republic going forward and that a forced merger like the UBS deal for Credit Suisse might have to occur. Bank of America would head the list seeing it seems to be the lead bank in the $US30 billion bailout.
The FT said UBS was also evaluating the potential risks a deal could have for its own business.
Now news of the deal is out in public, it can’t be called off without triggering a catastrophic slide in share markets today (Monday) and especially in banking and finance shares. The shares of UBS and Credit Suisse would plunge if the deal doesn’t happen.
Both banks would be in trouble is if that happens, even if many executives are reported to be opposed.
Credit Suisse’s market value has plunged to about 7.4 billion Swiss francs ($US8 billion), from a 2007 peak of more than 100 billion francs. UBS’s market value is 60 billion francs (US56 billion, or around $A105 billion which is much less than the value of the Commonwealth Bank’s $A162 billion).
Credit Suisse can trace its roots back to 1856 but its long been on the edge of dodgy baking practices, surviving a series of blow-ups, scandals, leadership changes and legal issues. The company’s 7.3-billion-franc loss last year wiped out the previous decade’s worth of profits.
Clients pulled more than $US100 billion of assets in the last three months of last year as concerns mounted about its financial health, and the outflows have continued even after it tapped shareholders in a 4-billion-franc capital raise. Billions more have flowed out in recent days.
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News of the UBS-Credit Suisse talks came after trading ended for the week.
Markets had closed on the downside of momentum after nervousness broke out about the health of the banking groups - the fall was especially hard to understand after the $US30 billion temporary bailout of troubled First Republic Bank in the US which came a day after the $US60 billion support package for Credit Suisse from the Swiss National Bank.
All that left markets lower on the day and the week and a testing session later today with the ASX 200 looking at a near 100-point slump.
The Dow lost 384.57 points, or 1.19%, to close at 31,861.98 points. The S&P 500 slid 1.1% to end at 3,916.64 points, while the Nasdaq was down 0.74% to 11,630.51 points.
The Dow lost 0.15% for the week but the Nasdaq surged by more than 4.4%
The S&P 500 shares actually rose 1.4% for the week having fallen further than other markets the week before in an initial response to the banking problems.
But Eurozone shares fell 4.2%, Japanese shares fell 2.9% and Chinese lost 0.2%. Australian shares fell 2.1% playing catchup to the falls in US shares and as global worries weighed on energy & material stocks.