Over the weekend, Swiss regulators engineered an emergency rescue package for Swiss bank Credit Suisse in the form of a merger with its long-time rival UBS.
Credit Suisse shareholders have suffered a loss of more than 70% this year, as the beleaguered bank has been hit by a series of crises that undermined the confidence of shareholders and customers alike.
And the failure of another major bank after the high-profile collapse of Silicon Valley Bank (SVB) in the US has rippled through the wider financial sector, with UK and US banks nursing significant share price falls over the last month.
We’re going to take a closer look at what existing and potential investors need to know about Credit Suisse shares after the merger announcement.
Note: market-based investments can go down as well as up, and you may lose some, or all, of your money. If in doubt, you should seek financial advice before deciding whether to invest.
The performance of Credit Suisse shares over the last five years is shown in Figure 1 below:
The company’s share price has steadily declined over the last five years, with a fall of 90% in the last year alone.
Last week, Credit Suisse’s auditor, PricewaterhouseCoopers (PwC) identified ‘material weaknesses’ in the bank’s internal controls in its annual report. And there was further bad news as the company reported a loss of over CHF7 billion (£6 billion) amid substantial withdrawals and also warned of substantial losses for 2023.
This was the latest in a long line of scandals and crises to hit one of Switzerland’s oldest banks. Last year, it was convicted of failing to prevent money laundering by Bulgarian cocaine traffickers and was also ordered to pay substantial damages after a long-running fraud committed by a former adviser.
In 2020, Credit Suisse’s CEO was forced to leave the company after an investigation uncovered extensive spying operations carried out on its former head of wealth management (after he jumped ship to UBS).
Mounting concern over the stability of Credit Suisse prompted customers to pull their funds from the bank, along with panicked shareholders. This led to fears that the bank could become insolvent without the implementation of emergency measures.
The Swiss central bank provided a CHF50 billion (£44 billion) lifeline to the bank last week, but the authorities were forced to intervene to prevent further economic turmoil spreading.
Jason Hollands, managing director of Bestinvest, comments: “There were broadly three possible outcomes, none of which were enticing for shareholders: nationalisation, insolvency or this effective bailout by UBS which was orchestrated by Swiss authorities.
“The weekend deal has been pretty brutal for Credit Suisse shareholders who didn’t even get to vote on the deal, but much worse for the bank’s AT1 (known as additional tier-one bonds) bondholders who’ve been wiped out entirely.”
The merger between Credit Suisse valued the company at CHF3 billion (£2 billion), a near 60% discount to its valuation at the close of play last week.
Existing shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held. Unusually, the merger will not be subject to shareholder approval and is expected to complete by the end of 2023.
As part of this process, Credit Suisse shares will be delisted from the Swiss and New York stock exchanges.
UBS shares closed the week at CHF 17.26 (Swiss Francs) while Credit Suisse shares are priced at CHF 0.86.
Investors are still able to buy Credit Suisse shares, either directly on the Swiss stock exchange or indirectly through American Depositary Receipts (ADRs) on the New York Stock Exchange.
The shares are currently trading in line with the agreed valuation of the company, however, this will fluctuate depending on the price of the UBS shares that Credit Suisse shareholders will receive in consideration for the merger.
UBS shares have dipped slightly over the last week as investors weigh up the potential long-term boost to earnings against the cost and risks of absorbing the company’s loss-making competitor.
Bestinvest Mr Holland’s comments: “For former Credit Suisse shareholders who will have a much reduced stake in an enlarged UBS, it is too soon to assess the outlook. On the one hand UBS may have got a bargain and should be able to take a lot of costs out and have been given a generous backstop by the Swiss authorities.
“But the history of bank mergers isn’t great, they will still need to address some of the issues that the Credit Suisse management team were grappling with and there continues to be considerable uncertainty hanging over the banking sector.”
AJ Bell’s Russ Mould adds: “Credit Suisse has a valuable Swiss retail and commercial banking operation, a profitable wealth management operation, an asset management arm and then the investment bank. I would assume UBS will be interested in making the most of absorbing a rival in the first three instances.
“However, less so with regard to the investment bank, where chair Colm Kelleher stated on Sunday at the Bern press conference that the investment bank would be downsized and exposure kept to a maximum limit of the new bank’s (risk-weighted) assets.”
The merger could put up to 11,000 jobs in London at risk across the two banks, while bonus payments may also be curbed. The Swiss authorities have requested the suspension of certain deferred bonus payments from previous years, although the full details are not yet clear.
Holders of additional tier-one bonds (known as AT1 bonds) have been hit particularly hard, with their value written down to zero by the merger.
Russ Mould, investment director at AJ Bell, comments: ““AT1 bonds can be converted into equity or written down entirely if certain conditions are met, with the decision triggered by capital strength falling below a predetermined level (i.e. when the issuer gets into trouble).
“These bonds typically offer high yields to reflect the additional risks. The Swiss financial regulator has ordered that Credit Suisse’s AT1 bonds be written down to zero. That appears to have spooked investors and has led to a sell-off in other bank debt.”
Bestinvest’s Mr Hollands adds: “You’d normally expect bondholders to rank ahead of shareholders in pecking order. The AT1 bonds of other banks have reacted badly to this so far and one lasting impact is that the cost of capital is going to go up for banks, so stricter lending criteria is inevitable and that will have consequences for the real economy.”