The one thing that couldn’t be saved for Credit Suisse was its reputation

UBS rises as Europe’s new megabank as Credit Suisse finally loses the trust of the market.

UBS Chairman Colm Kelleher (R) shakes hands to Credit Suisse chairman Axel Lehmann (L) after a press conference following talks over Credit Suisse in Bern. Picture: Fabrice COFFRINI / AFP

In investment banking everything comes down to reputation. And after the massive reputational hits and own goals of recent years – mostly around risk failures – Credit Suisse simply lost the trust of the market.

With $US650bn ($971bn) in credit exposures still sitting on its weakened balance sheet and the wounds of names like Australia’s Lex Greensill or losses from the Archegos hedge fund fraud, there were fears about what else was lurking in the shadows Credit Suisse’s accounts.

And once the Swiss central bank declared on Thursday that it was planning to offer a massive funding backstop for Credit Suisse to protect it while investors and depositors were bailing, it was all over for the investment bank. The last layer of its reputation was gone.

Until last week Credit Suisse still traded on the fact it didn’t need a government bailout during the global financial crisis.

The global headquarters of Swiss bank Credit Suisse in Zurich. Picture: Getty Images

While UBS was clearly a reluctant buyer when it was forced into weekend talks with its cross-city rival, it will come out of this bigger than ever.

The deal, brokered by Swiss regulators over the weekend, will be fundamentally change UBS’ business model in move that could be just as transformational as Wall Street bank Morgan Stanley buying out the Smith Barney venture during the financial crisis. Indeed the buyout delivers UBS a prime Asian footprint while turbocharging its push into the US.

Indeed with the blessing of regulators and implied funding to cover risks, UBS will become one of the biggest wealth and funds management businesses in Europe with $US5 trillion in assets; a significantly bigger private banking business; while securing Credit Suisse’s crown jewels of private banking and highly-regarded wealth platform across Asia.

It will also round out UBS’ investment banking arm, likely by picking up Credit Suisse’s key banking relationships while the broader Credit Suisse investment bank and its investment risks are managed down. It will also see UBS become a dominant bank in wealthy Switzerland and use this position to expand further through Europe.

Significantly, in a market where there is a global war for banking talent, some of the best Credit Suisse bankers will be retained by UBS.

Credit Suisse in Sydney hours after UBS launched a deal to rescue the embattled investment bank. Picture: Jane Dempster/The Australian.

As one local banker noted yesterday UBS will never need to do another acquisition again.

The $US3.25bn buyout sees UBS pick up a balance sheet of $US531bn – although there are big doubts about the health of some of these and this where there is still strong possibility that UBS may seek to back out of the deal. There is also longer term legal liability from Greensill or Archegos.

On paper at least the two banks would have combined total assets of $US1.6 trillion and risk weighted assets of $US570bn. UBS chairman Colm Kelleher was keen to impress to investors on the bank’s Sunday night phone hook-up there were protections in place from regulators.

“I would like to make it clear that while we did not initiate discussions, we believe that this transaction is financially attractive for UBS shareholders, protects UBS from additional downside and should support earnings growth,” Kelleher told the briefing. Although positive earnings boost will still be years away.

Bond pain?

One area that is going to come under intense scrutiny and has emerged as a new fracture for markets is the elimination of Credit Suisse’s so called “additional” tier one bonds. These were the bonds designed to provide additional protection for banks regarded as too big to for investors to take losses and protect taxpayers. Credit Suisse had $17bn on issue and were written down to zero by the Swiss central bank as part of the deal.

The bond market is reacting very badly to the idea that equity investors will at least get $US3.25bn in a credit Suisse sale, but bond holders get nothing. This has cast a shadow over similar bonds issued by other banks amid fears these become worthless at a stroke of a pen and debt investors put at the end of the queue behind equity investors.

A employee is seen in silhouette with sign of Swiss giant banking UBS and a sign of Credit Suisse bank in Zurich. Picture: Fabrice AFP

A radical restructure of Credit Suisse was already underway with plans to spin off the investment bank and cut 9000 jobs. Prior to this week it had plans to raise more funds to bolster its balance sheet through a series of sales of its higher risk trading portfolio.

Australian bankers were more emotional than bragging about the downfall of the investment bank that has been in the Australian market for more than 50 years. Indeed there were many that worked through Credit Suisse or knew someone who had been with its earlier incarnation – CS First Boston.

While the investment bank had lost substantial momentum in recent years, it was behind some of the biggest transactions that shaped Australia’s capital markets over the decades. This includes leading the $14bn sharemarket listing of Telstra in 1997; it was involved in other megadeals from the then $20bn demutualisation of AMP; to playing a lead advisory roles in Commonwealth Bank’s $9.6bn buyout of Colonial in 2000. (David Murray the chief executive of CBA at the time later become a senior advisor to Credit Suisse in Australia).

Elsewhere it was involved in the $3.3bn demerger of BlueScope from BHP and more recently leading the advice on the $11bn port of Melbourne sale. In the early 1990s then Credit Suisse banker John Wylie famously engineered the sale of Victoria’s electricity assets, netting an eye watering windfall for the then Premier Jeff Kennett.

Where to now?

For Credit Suisse. Regulators had little choice but to act. As a globally systemically important bank, Credit Suisse’s connections and counter party exposures were everywhere. The vaporisation would simply set bombs off and force many other banks to take unrealised losses when they least need it. In Australia the franchise was still modest with more than $4bn in deposits. UBS will need to reapply for a banking license here or take the Credit Suisse bank.

Global central banks were acutely aware of the ramifications with the names such as the US Federal Reserve, the European Central Bank and Swiss National Bank and Bank of Canada banding together to offer US dollar funding lines for anyone in the market who needed it. This was to avert a credit crunch, the very thing that spurred on the GFC.

There GFC mark II is not here. Yet. There will be more market disruption – particularly around the bonds, and potentially more bank collapses. But banks on the whole are strongly capitalised. The banks to become stressed so far – Silicon Valley and Credit Suisse clearly had problems around risk management. Central banks too have been show they are prepared to move much quicker and in a more co-ordinated fashion to stem any contagion. Funding is the name of the game and so far that remains available.

Australian fallout

There could be residual fallout from Credit Suisse’s and even the demise of Silicon Valley Bank demise if funding markets become fractured. Focus now swings to ANZ’s planned $4bn-plus buyout of Suncorp bank, with pressure rising on regulators to fast-track a deal.

Suncorp’s bank remains in regulatory limbo with the competition regulator assessing the merits of the friendly buyout that was unveiled back in July last year. Suncorp these days is a low risk bank, with two-thirds of its funding coming from customer deposits and most of its exposure to mortgages. However it does rely on global funding markets to make up the difference and as a smaller regional bank it is going to have to pay up.

In addition markets hate uncertainty and the ACCC is not scheduled to make its final decision on ANZ’s move on Suncorp until June 12. Then it is up to Treasurer Jim Chalmers to make the final call. In the current fast-moving market that might be too long to wait. At the same time brokerage Citi calculates there is some $200bn worth of funding due to refinanced by Australian banks with the term funding facility put in place during the Covid-19 years by the Reserve Bank set to mature.

While this is not a Silicon Valley Bank style situation “history has shown that withdrawal of liquidity does not end well,” says Citi’s banking analyst Brendan Sproules.

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Originally published as The one thing that couldn’t be saved for Credit Suisse was its reputation