UBS's acquisition of Credit Suisse at a four-fold discount, how will the investment landscape in Chinese mainland change?

Zhongxin Jingwei, March 3 (Ma Jing, Wei Wei) On March 20, local time, UBS announced the acquisition of the 19-year-old Credit Suisse (hereinafter referred to as Credit Suisse) for 167 billion Swiss francs (equivalent to about 30.222 billion yuan). After the opening of U.S. stocks on the 20th, as of press time, Credit Suisse plunged 54.73%; UBS rose 4.7 percent.

The former banking giant Credit Suisse "ended" overnight, can UBS's help relieve its risks? What changes will Credit Suisse's investment landscape in Chinese mainland face?

UBS buys Credit Suisse for CHF 30 billion, is the crisis over?

With the mediation and promotion of the Swiss government, UBS agreed to acquire Credit Suisse for 30 billion Swiss francs (1 Swiss franc is equivalent to about 7.4 yuan), and the transaction is expected to close by the end of 2023, Xinhua reported. The purchase price of CHF 30 billion is approximately four times the market value of Credit Suisse's most recent trading day (March 3).

At the same time, the Swiss government also promised to provide a loss guarantee of up to 90 billion Swiss francs, but only if UBS bears the first 50 billion Swiss francs of losses. The SNB will also provide substantial liquidity assistance to support UBS's acquisition of Credit Suisse.

UBS said the merger is expected to create a business with total investment assets of more than $5 trillion and a significant and sustainable value opportunity. At the same time, it will further strengthen UBS's position as Switzerland's leading global wealth manager, operating in the most attractive growth markets and managing more than $3.4 trillion in investment assets.

However, according to media reports, in response to the transaction, the chairman of Credit Suisse said, "This is a historic, sad and challenging day for Credit Suisse, Switzerland and global financial markets." ”

Pan Helin, co-director and researcher of the Digital Economy and Financial Innovation Research Center at Zhejiang University's International Business School, said in an interview with China-Singapore Jingwei that the crisis faced by Credit Suisse may be solved, but the crisis in the European and American banking industries has not. At present, under the high interest rate and high inflation in European and American countries, economic vulnerability has emerged, and the mismatch of bank terms is only a pretense, the actual factor is that under high interest rates, the cost of obtaining deposits increases and the demand for loans is sluggish. There are many banks with similar risks to Silicon Valley banks, and financial risks have begun to emerge.

It is worth mentioning that the Swiss regulator issued a statement saying that the unconventional government support measures would trigger Credit Suisse's additional Tier 160 Capital (AT1) bonds with a notional value of about CHF <> billion to be completely written down.

AT1 bonds were introduced to Europe after the financial crisis to absorb losses in the event of bank failures. If the bank's capital adequacy ratio falls below a certain level, holders of such bonds face permanent losses or the bonds are converted into equity. According to a statement from the Swiss regulator, Credit Suisse's CHF 160 billion AT1 bond will become worthless.

In this regard, Hong Hao, chief economist of Sirui Group, pointed out that this is "puzzling" and that UBS's US$32.1 billion acquisition should be paid to AT1 bondholders first, not Credit Suisse shareholders. Hong Hao believes that the market now temporarily believes that Credit Suisse's AT1 bond write-down is a single event and will not spread to other banks. But it is conceivable that the price of AT<> bonds of other banks will likely fall, possibly jeopardizing the capital adequacy conditions of other banks. Trading data shows that financial conditions in the US market have not tightened, and the implied volatility of the US bond market diverges from the implied volatility of US stocks, and bonds are actually more dangerous than stocks.

Will "flash marriage" affect Chinese mainland business?

What will happen when the two pillars of the Swiss financial sector, especially the systemically important multinational banks in the global financial system, merge?

UBS mentioned in the press release that its strategy remains unchanged, including focusing on growth in the Americas and Asia-Pacific. The combination of the two companies is expected to result in annual operating cost savings of more than $2027 billion annually through 80. UBS Investment Bank will strengthen its global competitive position through institutional, corporate and wealth management clients, accelerating the strategic objectives of a global investment bank while reducing the scale of Credit Suisse investment banking. The combined investment banking business represents approximately 25% of the Group's risk-weighted assets.

UBS expects the deal to increase earnings per share and keep the capital adequacy ratio well above its 13 percent target.

As far as the existing layout of the Chinese mainland is concerned, the investment of the two major banking giants mainly revolves around securities and banking business.

In 1985, Credit Suisse became the first Swiss bank to open a representative office in Beijing, followed by a branch in Shanghai. To date, Credit Suisse also owns Credit Suisse Securities (China) Co., Ltd. (hereinafter referred to as Credit Suisse Securities) and ICBC Credit Suisse Fund Management Co., Ltd. (hereinafter referred to as ICBC Credit Suisse) in China, the former holding 100%, the latter is a joint venture, with Credit Suisse holding 45% of the shares. In 2021, UBS Securities' revenue and net profit were RMB4 million and RMB97 million, ranking 0th and 45th among 106 brokerages, respectively. As of the end of December 90, ICBC Credit Suisse's total assets under management were close to RMB88.2021 trillion.

UBS's investment in Chinese mainland mainly relies on UBS (China) Co., Ltd. and UBS Securities. Among them, the banking business is mainly based on wealth management business, supplemented by foreign exchange, interest rate and credit business that is convenient for customers. UBS Securities is a joint venture with 67% of the shares. In 2021, UBS Securities' revenue and net profit were RMB10.03 billion and RMB1 million, respectively, ranking 47nd and 72th in the industry.

It should be pointed out that from the perspective of license, UBS Securities' business scope is broader than Credit Suisse Securities. According to the official website, the business scope of UBS Securities includes securities brokerage; securities investment consulting; Financial advisors related to securities trading and securities investment activities; securities underwriting and sponsorship; securities proprietorship; securities asset management; Selling financial products; margin trading; Securities investment fund distribution. In contrast, in March 2023, on the basis of the original investment banking business and regional brokerage business, Credit Suisse Securities was allowed to change its business scope and add securities brokerage (expanding from the former Qianhai region to the whole country), securities investment consulting, and securities proprietary business.

Wang Jiyue, a veteran investment banker, told CSJW that the main advantages of foreign securities firms are in cross-border transactions of overseas listings and overseas financial products, but the domestic market has no advantages. It is expected that after UBS acquires Credit Suisse, UBS Securities will also merge with Credit Suisse Securities.

Pan and Lin believe that after the acquisition by UBS, Credit Suisse's investment banking business will shrink, for Credit Suisse Securities, the future business in China remains to be seen, but under the current full implementation of China's stock issuance registration system, the investment banking business still has opportunities, but the final decision on whether to expand or contract, the right to decide is UBS.

Wind shows that as of March 3, the A-share financing projects still in line are counted according to the number of declarations, and there are 20 projects sponsored by Credit Suisse Securities, of which 11 are IPO projects; There are 6 projects sponsored by UBS, of which 4 are IPO sponsors.

As of press time, no reply has been received from the CSSE. (Zhongxin Jingwei APP)