European markets were back in the green and Asian bourses recovered partially after initial losses. Image Credit: Shutterstock

Dubai: Can the Swiss government, the Swiss central bank and central banks elsewhere do enough to prevent the Credit Suisse fallout from becoming a full-blown global banking crisis? A process led by UBS acquiring its troubled peer for something over $1 billion?

It would depend on what time you are looking for answers from the markets. By 2.22pm UAE time, gold was dropping back to under $2,000 – after breaching that mark for a third time in as many years just over an hour before.

By 2.30pm, European stock markets right in the epicenter of the Credit Suisse fallout were treading in the green, not by much but enough to soothe investor nerves that a UBS deal would be the best possible outcome for Credit Suisse.

Asian markets, which had volatile sessions right through the day, managed to ease off by close, with India’s Sensex down by just over 300 points after at one point crashing by more than 800.

Can the good vibes last?

Even if the selling price being talked about would be much lower than the $8 billion market cap Credit Suisse had as recently as last Friday (March 17). In a statement, the UBS Chair Colm Kelleher said: “We have structured a transaction which will preserve the value left in the (Credit Suisse) business while limiting our downside exposure.”

In another statement, UBS said: “Both banks also have unrestricted access to the Swiss National Bank existing facilities, through which they can obtain liquidity from the SNB (Swiss National Bank and the regulator there) in accordance with the guidelines on monetary policy instruments.”

Central banks egged on by governments are decisively intervening in the markets to still investor concerns – and more important, keep the liquidity going through at all times. (But might not go down well with the authorities is bankers at some of the troubled banks in the news these past few days still getting their bonuses, and setting off pointed reminders of what happened during the Global Financial Crisis bank bailouts.)

Pain there will be

There will be a lot of investors with Credit Suisse investors acutely feeling the pain. “The takeover by UBS will result in some 16 billion Swiss Francs (or Dh63 billion) worth of Credit Suisse ‘Additional Tier 1’ notes being completely written-down in order to increase core capital notes,” notes Simon Ballard, Chief Economist for Market Insights & Strategy – Global Markets at Abu Dhabi mega-bank FAB.

“Meanwhile, CS shareholders are set to receive around 3 billion Swiss Frances as part of the rescue package. Of course, ‘usually’, in a typical write-down situation, shareholders take the first hit, followed by investors in the riskier end of the credit spectrum (i.e,. AT1 notes).

“So, understandably, the decision to sacrifice the latter to effectively protect the former has not been received well by AT1 holders.”

This Saudi investor is cushioned

One shareholder in Credit Suisse is Saudi National Bank, one of the biggest names in the Gulf’s banking sector. On Monday, Saudi National Bank issued a statement saying that there will be zilch impact on profitability from the UBS deal.

As at December last, ‘SNB’s investment in Credit Suisse constituted less than 0.5 per cent of SNB’s total assets, and c. 1.7 per cent of SNB’s investments portfolio’, the Saudi bank said. “From a regulatory capital perspective, the impact on SNB’s capital adequacy ratio from the mark-to-market decline in Credit Suisse was c. 15 basis points as of December 2022, with nil impact on profitability.

“In the light of the recent market announcement, the potential impact to SNB’s capital adequacy ratio is c. 35 basis points, with nil impact on profitability.”

It was last November SNB made a SR5.5 billion, or 9.88 per cent, investment in Credit Suisse as part of a capital raising exercise by Credit Suisse.

“The Saudi National Bank’s total assets exceed SR945 billion - SNB remains comfortably above all prudential thresholds and continues to enjoy healthy capitalisation and liquidity. SNB remains focused on its core strategy of growth in Saudi Arabia, which is among the fastest growing countries within the G20.”

Will AT1 notes cast one long shadow?

Whichever way the deal progresses, investors’ losses on Credit Suisse AT1 notes will remain a nagging worry. “The bank’s deal with UBS will cause a complete write-down of Credit Suisse’s 16 billion Swiss Francs worth of Additional Tier 1 bonds, as the riskiest notes introduced after the global financial crisis are known,” said Bal Krishen, Chairman and CEO, Century Financial.

“This would mark the most significant loss yet for the investors of these bonds. Pension funds and Insurance companies, attracted by the yields, are the most prominent investors in these types of securities. UAE investors to financial products containing these securities are likely to take a hit.

“Another worry would be the international ramifications. The Global Financial Crisis of 2008 led to the failure of many large financial institutions, the bailout of banks by national governments, and a severe economic downturn. If not contained, the current turmoil could have spread worldwide. For now, it seems the crisis is contained with central banks worldwide providing emergency liquidity to help tide over the problem.”

How long can that last?
“The emergency lifelines being thrown to banks by regulators and governments, among others, appear to have now halted contagion within the sector, largely containing the crisis from hitting other firms and other sectors.

“Global investors’ nerves will be calmed after the US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank in a coordinated statement, which came ahead of the opening of financial markets in Asia on Monday, all vowed to boost liquidity to ease pressures in the international financial system.

“It underscores the commitment to do whatever it takes to avert another wholesale crash. This brings the confidence and certainty that markets crave.”

- Nigel Green, CEO of deVere Group