Table of Contents
- How Have Credit Suisse Shares Performed?
- Why the Merger with UBS?
- How Will the Merger Affect Shareholders?
- Can Investors Still Buy Credit Suisse Shares?
- How Will the Deal Affect Australian Investors?
- What About Credit Suisse Bondholders?
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Swiss regulators have 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.
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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 Australian, UK and US banks nursing significant share price falls over the last month.
While the ASX has been rattled by the bank collapses overseas, predictably, the big four banks have fared worse than other ASX200 stocks, losing as much as 15% from previous highs earlier this year. The ASX is down by more than 8% for the comparable period.
Meanwhile, ANZ CEO Shayne Elliott published remarks on the ANZ Blue Notes website today that addressed concerns recent banking shocks could be the precursor to another global financial crisis.
“It’s like that old saying, you know, that history doesn’t repeat, but it rhymes. There are lots of rhymes here that we can see in previous turmoils or crises, including the GFC, but actually, when you really get the microscope out, the causes and what’s going on here are really, really different than the GFC,” Elliott says.
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 and the potential ramifications for the Australian arm of the company.
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.
Why the Merger with 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 ($81 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, told Forbes Advisor: “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, CoCos or ‘bank hybrids’ in Australia) bondholders who’ve been wiped out entirely.”
Traditionally, corporate bond holders rank ahead of equity investors in any collapse, but this was not the case with the UBS deal, shocking many Australian investors.
How Will the Deal Affect Australian Investors?
There absence of Credit Suisse will be felt in Australia’s cash equities market, where, as the AFR points out, the company has handled about “one-tenth of all trades involving an ASX-listed company”. Credit Suisse’s Australian desk handled 10.3% of the Australian equities market in 2022, according to the AFR, and 7.1% so far this year.
Then, of course, there is the more immediate effect of the local desertion of the bank: some $1 billion has outflowed in the past week from the local private arm of Credit Suisse in Australia, as jittery investors sought safer harbours and took up offers from rival banks.
According to the Weekend Australian, UBS plans on retaining Credit Suisse Australia’s private banking arm, with sources telling the masthead that local UBS chiefs would use the merger as an opportunity to re-enter the local wealth management market. Alongside Brazil, Australia is the only large market where UBS does not have a hand in wealth management. It exited the space in 2016 after profitability issues.
National Australia Bank has indicated it would consider buying Credit Suisse’s local arm should UBS choose to off-load rather than re-enter the local market. There are talks, however, of local job losses as UBS looks to avoid areas of duplication in the Australian market.
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What About Credit Suisse Bondholders?
Holders of additional tier-one bonds (known as AT1 bonds or CoCo bonds ) have been hit particularly hard, with their value written down to zero by the merger. Bonds to the value of $25 billion were written down.
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.”
Stephen Bartholomeusz predicted in the Sydney Morning Herald that the treatment of bondholders in the UBS deal would affect the status of CoCo bonds—and investors’ willingness to go near them.
“In the near term, at least, the total losses experienced by Credit Suisse’s CoCo bondholders will shut down that market for bank issues and make investors nervous about all issues of AT1 bonds, regardless of regulators’ assurances,” he wrote.
