UBS Agrees to Buy Credit Suisse for More Than $3 Billion

UBS Group AG agreed to take over its longtime rival Credit Suisse Group AG for more than $3 billion, pushed into the biggest banking deal in years by regulators eager to halt a dangerous decline in confidence in the global banking system.

The deal between the twin pillars of Swiss finance is the first megamerger of systemically important global banks since the 2008 financial crisis when institutions across the banking landscape were carved up and matched with rivals, often at the behest of regulators.

The Swiss government said it would provide more than $9 billion to backstop some losses that UBS may incur by taking over Credit Suisse. The Swiss National Bank also provided more than $100 billion of liquidity to UBS to help facilitate the deal.

Swiss authorities were under pressure to make the deal happen before Asian markets opened for the week. They had to walk a fine line, needing to get the two banks’ boards to agree to the deal and avoiding the alternative, a regulator-led winddown of Credit Suisse, which could have proven more protracted and painful for the financial system.

The urgency on the part of regulators was prompted by an increasingly dire outlook at Credit Suisse. The bank faced as much as $10 billion in customer outflows a day last week, according to a person familiar with the matter.

Regulators also worried that Credit Suisse’s failure could make Switzerland a new source of contagion for global stress. Hours after the UBS deal, a group of central banks, including the Federal Reserve and the Swiss National Bank, announced an expanded dollar swap line, a type of international lending operation. They called the expansion “an important liquidity backstop to ease strains in global funding markets.”

Credit Suisse Chairman Axel Lehmann said the recent bank troubles that started in the U.S. were too much to withstand. “The acceleration of the loss of trust and the worsening of the last few days made it clear that Credit Suisse cannot continue to exist in its current form,” he said.

UBS Chairman Colm Kelleher said UBS would shrink Credit Suisse’s investment banking business and align it with UBS’s “conservative risk culture.” He said the deal “supports financial stability in Switzerland and creates significant sustainable value for UBS shareholders.” To help absorb the deal, however, UBS said it would pause its stock buyback program.

The sudden collapse of Silicon Valley Bank earlier this month prompted investors globally to scour for weak spots in the financial system. Credit Suisse was already first on many lists of troubled institutions, weakened by years of self-inflicted scandals and trading losses, most notably the failure of two key clients in 2021, Greensill Capital and Archegos Capital Management.

Despite repeated executive changes and pledges to reform, there was what felt to investors like a never-ending series of stumbles.

The bank’s new management, which took over last year, many of them hailing from UBS, tried a campaign of reassurance among customers and promised a restructuring that would turn the bank around.

The bank had just raised $4 billion in fresh equity from Saudi National Bank and other investors last fall to finance a sweeping overhaul. But customers were fleeing in droves and taking with them $120 billion in assets under management in the last months of 2022.

Its stock price and bonds in free fall, Credit Suisse took a $54 billion lifeline from the Swiss National Bank last Thursday. Switzerland’s finance minister Sunday said the liquidity line was doubled later that day to ensure the bank could survive until the weekend.

But Swiss officials, along with regulators in the U.S., U.K. and European Union, who all oversee parts of the bank, feared it would become insolvent this week if not dealt with, and they were concerned crumbling confidence could spread to other banks.

Finma, Switzerland’s financial regulator, said Credit Suisse experienced a “crisis of confidence.” It added that there was “a risk of the bank becoming illiquid, even if it remained solvent, and it was necessary for the authorities to take action in order to prevent serious damage to the Swiss and international financial markets.”

Finma said that operations of the banks would open normally on Monday “with no restrictions or interruptions.”

The talks among the regulators and the two banks began last Wednesday.

Regulators laid out two choices: a takeover or a bankruptcy. Bankruptcy would be a protracted mess, and inside UBS executives worried that it would taint the whole brand of Swiss banking, according to a person familiar with the matter.

That accelerated discussions with the Swiss authorities about a deal.

A forced marriage of the two titans of Swiss banking was something UBS had never wanted. Credit Suisse had a laundry list of scandals and problems. Its big investment bank was the opposite of the “capital light” model UBS had been fashioning for years—one built around earning fees for managing the finances of rich clients.

But other parts of it were attractive: It is UBS’s chief rival in the local Swiss banking system. A merger of the two in other times might have seemed like an impossibly monopolistic combination. The Swiss authorities granted UBS a waiver.

And Credit Suisse has a cache of rich wealth-management clients in Asia that dovetails with UBS’s similar business and ambitions there.

The ugly spot is the investment bank. Credit Suisse had been winding down big chunks of its operations, and had planned to spin off the advisory business into a new firm run by a former board member, banker Michael Klein.

That spinoff is now in doubt, but the Swiss government agreed to share in parts of the losses that UBS might incur in winding down the rest, according to the people familiar with the matter.

On Sunday, there was a last-ditch effort by a group including Credit Suisse’s largest shareholder, Saudi National Bank, to keep the lender alive, according to people familiar with the offer. The group made a rival proposal to inject around $5 billion into Credit Suisse. Under the plan, Credit Suisse bondholders would have been fully protected.

Swiss ministers rejected the offer outright, according to the people. The shareholders wanted the same government backstops being offered to UBS, such as the liquidity line, but were turned down.

Agitation by the shareholders did have an effect. An earlier UBS proposal to pay around 1 billion Swiss francs, or around $1.1 billion, was eventually lifted to 3 billion francs, paid in UBS shares. Still, that is less than half of Credit Suisse’s last traded market value on Friday.

Also bearing big losses will be holders of $17 billion worth of Credit Suisse “additional tier 1” bonds, which are securities that look like bonds of a bank until the bank gets in financial trouble, at which point they become worthless.

Eliminating the AT1 bonds shaves billions off the obligations that UBS will assume. Without wiping out those bonds, according to people close to the deal, the math for UBS shareholders didn’t work.

An end to Credit Suisse’s nearly 167-year run marks one of the most significant moments in the banking world since the last financial crisis. It also represents a new global dimension of damage from a banking storm started with the sudden collapse of Silicon Valley Bank earlier this month.

Unlike Silicon Valley Bank, whose business was concentrated in a single geographic area and industry, Credit Suisse is a global player despite recent efforts to reduce its sprawl and curb riskier activities such as lending to hedge funds.

Credit Suisse had a half-trillion-dollar balance sheet and around 50,000 employees at the end of 2022, including more than 16,000 in Switzerland. It has investment banking units in cities including New York, London and Singapore, as well as an operations hub near Raleigh, N.C., and employs thousands in technology in India and Poland.

UBS has around 74,000 employees globally. It has a balance sheet roughly twice as large, at $1.1 trillion in total assets. After swallowing Credit Suisse, UBS’s balance sheet will rival Goldman Sachs Group Inc. and Deutsche Bank AG in asset size.

Mr. Kelleher, the UBS chairman, said it was too soon to say the number of job cuts that would occur. Credit Suisse was already planning to eliminate 9,000 jobs.

Credit Suisse is advised by Centerview Partners. UBS’s financial advisers are JPMorgan Chase & Co. and Morgan Stanley.