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Switzerland’s new megabank is bad news for Swiss bankers

Apress conference 19 March in Bern, Credit Suisse and Swiss bank, two rivals in Swiss banking, have announced an important but unfortunate alliance.After days of haggling and years of gradual desperation, regulators tried to avert a crisis by hastily merging banks with assets worth twice as much as Switzerland gross domestic product.

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The deal capped a bewildering decline for Credit Suisse as its depositors and counterparties lost confidence in a working week. The banking system survived, even if 167 years of Swiss banking history did not. Attention has now turned to the implications of hastily written deal terms – and the prospects for Switzerland’s new banking supergroup.

This collaboration reflects the recent history of the two institutions.Both suffered losses during the 2007-09 global financial crisis, when Swiss bank Received a bailout from the Swiss government. More recently, though, their paths have diverged.as Swiss bank Credit Suisse steadied on a string of high-profile incidents, slipping to lower levels. The bank lost 7.3 billion Swiss francs ($7.6 billion) last year, its worst performance since 2008.Credit Suisse shares fell 70% in the three years preceding the deal; that Swiss bank more than doubled.

The merger values ​​Credit Suisse at about 3 billion Swiss francs, 60 percent below its stock market valuation and a fraction of its tangible book value of 42 billion Swiss francs. Shareholders outperform the bank’s additional tier-1 shareholders (exist1) Bonds – a type of debt designed to absorb losses from bank failures – were wiped out in the largest ever losses for holders of such instruments.

existThe 1 holder who is usually expected to stand behind the shareholder in the slaughterhouse queue has a stroke. Some are replaying the legal maneuvers of the past week, perhaps in vain, in an attempt to argue that losses should not have been incurred.As Credit Suisse shareholders will be paid in stock, the bank’s exist1 holders will only become more annoyed if Swiss bank Shares rebounded. The company’s shares have risen more than 5% since the deal was announced.

Although the price exist1 Bonds issued by other banks have fallen due to acquisitions, and the asset class is not being written off for now. exist1 Terms vary widely between issuers – most offer better protection than Credit Suisse. Jurisdictional differences are also important. The Bank of England and the European Central Bank rushed to reassure investors that their nightmare was unique to Switzerland and that they would be better protected if the UK or the eurozone collapsed. exist1 is permanent, meaning the bank will not be at risk of refinancing anytime soon.but Swiss bankwith a disproportionately large number of exist1 bonds, and if it does decide to issue more bonds to bolster its balance sheet, it could be punished by investors demanding higher returns.

The bank’s management faced the more pressing problem of integrating the two residents of Zurich’s Paradeplatz.Ralph Hammers, CEO Swiss bankmust transition from running the profitable agency he inherited in 2020 to navigating a chaotic ship in choppy waters. Swiss bank Will benefit from SNB liquidity of 100 billion Swiss francs and 9 billion Swiss francs of protection against possible losses in disposing of parts of Credit Suisse that it does not need. Mr Hamers plans to cut billions of dollars and hopes the deal will be profitable by 2027. Executing such a plan will be difficult due to the intense scrutiny of Swiss regulators.

The combination of the bank’s wealth management and Swiss banking might prove effective, even with potential hurdles. Previous wealth management megadeals have sent clients fleeing. Some prefer to keep funds in multiple institutions – an approach that seems wiser after the past two weeks. Shares in Julius Baer, ​​another follower of the Swiss rich, rose this week in anticipation of new clients.

fruit of alliance

But combined, the two divisions would be formidable forces. Swiss bank Possibly accounting for nearly a third of the Swiss market. The gem will retain its wealth management business, which has delivered an impressive average return on equity of 24% over the past five years. Swiss bank Will become the world’s second-largest wealth management company, with $3.4 trillion in assets under management, and has strong demands on the wallets of the world’s billionaires.Head of Wealth Management Iqbal Khan Joins Swiss bank Credit Suisse in the 2019 espionage scandal.

The path to profitability will involve deep cost-cutting, especially in the combined company’s investment bank, which will Swiss bank The scheme is firmly subordinated to its wealth manager.both Swiss bank In recent years, Credit Suisse has found it difficult to strike that balance. There are far more superstar bankers who have ever worked for a Swiss bank than there are Swiss banks today.

While Credit Suisse has already started swinging the axe, announcing the sale of its securitized products business last year, the operational changes now will be bloodier. Risky businesses that violate the rules will be transferred to “non-core” departments and quickly shut down. Swiss bank It is likely to pick Credit Suisse’s strongest dealmaking teams, including those advising on corporate acquisitions, and get rid of the rest. Only the banker with the best card holder has a chance of surviving the elimination.

Credit Suisse plans to spin off its investment banking business under the leadership of Michael Klein may be shelved.But a similar plan for an independent Swiss investment bank could ultimately prove attractive if Swiss bank Able to combine its strongest bankers with those of Credit Suisse. A slow trade market should help them retain top performers who might not be able to find work elsewhere, at least for now.

future Swiss bank It will no doubt look for other ways to lighten the bulk of its business and focus more on profitability. Almost everything will be level playing field outside the beloved wealth management sector.Deutsche Bank spin-off dwsIts asset management business could serve as a precedent for similar moves. Even before the merger, Credit Suisse had considered divesting some of its Swiss operations to raise capital.

Financial policymakers around the world want the combined institution to succeed. Unrest in the United States and Europe has already caused them to worry. But Swiss officials are undoubtedly the most keen on building a healthy alliance. The prospect of further trouble is chilling now. After all, this week’s solution – the merger – will be put on hold. The new megabanks are too big for such a deal.

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Editor’s Note: This story has been updated for March 20 market action.

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