Swiss banking giant UBS (UBS) could acquire ailing Credit Suisse Group (CS), said analysts for JPMorgan.
The most likely scenario is for Credit Suisse to be sold to UBS, Kian Abouhossein, an analyst for JPMorgan, wrote in a research note on March 16. Credit Suisse does not have a path forward as a stand-alone bank, he added.
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This outcome would be extraordinary as it would bring together the largest two Swiss banks and two former European bank flagships. Credit Suisse's market capitalization has risen back to $8 billion while UBS boasts a market cap of $63 billion.
Such a deal would be a sad end to Credit Suisse, which once was a financial juggernaut with clients worldwide. But investors punished the bank as it was beset by a number of scandals over the past three years.
On March 15, the bank's shares fell nearly 30% to an all-time low.
Credit-Default Swaps Jump to Records
Credit Suisse's credit default swaps, a form of insurance for bondholders, jumped to record highs. This meant that investors holding the bank's debt had to pay a lot more to insure themselves in the event that Credit Suisse could not repay them.
When the cost of CDSs rises sharply, it suggests that investors doubt that the company will be able to honor its debts.
Investors reacted to the fact that Saudi National Bank, the largest shareholder of Credit Suisse, had indicated that it would no longer increase its stake in the Swiss bank for regulatory reasons.
Saudi National Bank does not want to exceed the threshold of 10%, which would subject it to stricter supervision by regulators both at home and in Switzerland.
Swiss State Guarantee
On Thursday Credit Suisse received a lifeline: It'll borrow nearly $54 billion from the Swiss National Bank, the central bank, to bolster its liquidity.
But not everyone's pleased about the move. The Swiss People’s Party, a major political party, disagrees with the state guarantee for the bank.
"The government shouldn’t give Credit Suisse a state guarantee,” Thomas Matter, a member of the right-wing party leadership, said on Thursday.
The center-left Social Democratic Party was also not happy with the decision and sought “complete transparency.”
The issue at hand is the lack of confidence from investors, Abouhossein wrote on March 16.
The bank's current situation is "about ongoing market confidence issues with its IB strategy and ongoing franchise erosion,” he said. "Status quo is no longer an option.”
For the past two years, Abouhossein has sounded the alarm on Credit Suisse by giving the stock a rating of either neutral or underweight.
In February, he voiced concerns again and said the bank was declining at a quick pace.
But people familiar with the matter told Bloomberg that the two banks oppose a forced combination.
UBS wants to focus on its stand-alone strategy and hesitates to take on risks related to Credit Suisse, the people told the news service. And Credit Suisse, for its part, wants time to see through its turnaround, they said.
UBS Chief Executive Ralph Hamers said on Wednesday he would not discuss any "hypothetical” questions about Credit Suisse, the article said.
Credit Suisse CEO Ulrich Koerner's memo to the bank's staff on March 16 said the bank would prioritize its plan to improve the bank's outcome.
A second option that Abouhossein laid out is that the Swiss central bank "steps in with full deposit guarantee on all deposits or injects equity giving CSG time to restructure," he wrote.
Another potential outcome is closing the investment-banking arm of Credit Suisse, but Abouhossein said the process would be lengthy "and might not be enough to reduce market concerns at this point."
KBW analysts said Credit Suisse needs to undergo massive restructuring and that breaking up the various divisions would be the most favorable scenario to “simplify the bank.”
But Bank of America analysts said the financial support from the Swiss National Bank is sending a message that the bank can continue to operate alone.
