What has happened?
The takeover of Credit Suisse makes UBS the world's second largest asset manager for private customers and the third largest asset manager in Europe for institutional clients, with USD 5 trillion in assets under management. In Switzerland, UBS is clearly becoming the market leader in terms of customer deposits and lending business.
The purchase price of 76 centimes per share, based on the closing prices of Friday and the share exchange ratio, corresponds to less than 10 % of the book value last reported by Credit Suisse. The offer is to be finalised in the coming weeks after all international regulatory authorities have been consulted. The transaction is expected to be completed by the end of 2023. The integration and restructuring of the Credit Suisse units will take three to four years and will lead to an estimated cost reduction of CHF 8 billion.
UBS's takeover of Credit Suisse is probably the most expedient solution in the current situation and provides UBS with medium to long-term value-added opportunities. In the short-term, however, the challenges for banks, financial service providers and the insurance industry cannot be ignored.
How are we positioning ourselves?
In view of the current complex situation and its implications that are difficult to estimate, we continue to act cautiously. Overall, we continue to search for defensive quality stocks in our global portfolios, especially companies with strong balance sheets.
In a mixed portfolio, our defensive stance is reflected in the underweight in equities and corporate bonds. We expect a decline in earnings worldwide this year, which should trigger price losses if equity valuations remain high.
We are underweight in our active global and Swiss equity strategies in the financial sector (banks, financial service providers and the insurance industry) – especially since the market has switched to risk-off mode.
What's more, in our active funds, we do not hold any shares of the US banks in liquidation or any Credit Suisse shares.
What are the implications for the global economy?
The bankruptcy of three US banks, the emergency bailout of the First Republic Bank and now the takeover of Credit Suisse by UBS are reducing liquidity and leading to higher financing costs for the banks. This may reduce lending to companies, which in turn may have a deflationary effect and lead to a tightening of financial conditions for the overall economy. This is because interest costs have already risen significantly in the last twelve months.
We also see further implications:
- CoCo bonds under pressure: yesterday's decision to fully depreciate the CoCo bonds of Credit Suisse has caused frustration. We only hold a marginal share of CoCo bonds in Credit Suisse in our CoCo fund. Although the direct loss due to the depreciation of Credit Suisse AT1 capital in the fund is small, the losses in valuation due to the correction of the entire CoCo segment are significant. Today, the AT1 emissions of all banks therefore suffered greatly in early trading. The segment exhibits historically high risk premiums. However, according to our assessment, the banking sector in Europe in particular is in sound shape in terms of capitalisation and liquidity.
- Focus on liquidity: in light of the gloomy sentiment in the financial industry and depressed customer confidence, the supervisory authorities' priority is clearly shifting to liquidity. European banks are fundamentally less affected by liquidity problems and are less affected globally.
- Increased risk of recession: the stress in the banking system and the resulting decline in business activity, such as lending to companies with high refinancing requirements, could speed up the cooling of the global economy.
What are central banks doing?
The financial world is also occupied by the question: Will the US Federal Reserve continue to focus on combating inflation or on financial stability?
We believe that the Fed's focus will remain on inflation – provided the situation in the US banking market does not escalate. The situation as a whole remains very dynamic and we are actively monitoring it. Additional support measures from a regulatory perspective, such as further deposit guarantees, could trigger a positive sentiment surprise. They could lead to a re-evaluation of bank securities and adjustment of our portfolio positioning.
