Mar 20, 2023
European Banks Set to Fall After UBS Agrees to Buy Credit Suisse
(Bloomberg) -- Bank stocks avoided another tumble Monday after the historic takeover of Credit Suisse Group AG, yet investor sentiment remains fragile following a $1 trillion plunge this month in global financial shares.
Shares prices initially slumped because the acquisition by UBS Group AG will wipe out holders of Credit Suisse’s riskiest bonds, potentially sending the $275 billion market for bank funding into a tailspin. Investors, though, took some comfort from the decisive steps by Swiss authorities over the weekend to end Credit Suisse’s years-long descent into turmoil, as well as efforts by US regulators to stabilize banks there.
The Stoxx Europe 600 Banks Index rose 2.0% at 4:07 p.m. in Paris, erasing a loss of 6%. Intesa Sanpaolo SpA and BBVA contributed the most to the advance, while an index of banks in the S&P 500 climbed 2.4%. The so-called additional tier 1 bonds issued by several European banks fell by more than 10 percentage points. A fund that invests in the securities, Invesco AT1 Capital Bond UCITS ETF, sank 6.2% in London.
“What is certain is that there will be ripple effects from the Credit Suisse deal to the bond and equity market and we don’t know yet how much exposure international and regional banks have,” said Dickie Wong, director of research at Kingston Securities Ltd.
Of the 44 stocks in the Stoxx 600 bank index, 37 rose and 7 fell, reversing the trend from early in the session. HSBC Holdings Plc, which tumbled 6.2% in Hong Kong, was down only 0.2% in London. The index has lost 166 billion euros ($178 billion) in market value this month, while a broader MSCI Inc. gauge of world financial stocks has tumbled by $1 trillion through Friday. UBS, which fell as much as 16%, rebounded to a 3.1% advance.
Wall Street lenders also rebounded from losses in the premarket trading. JPMorgan Chase & Co. gained 1.8% and regional banks Fifth Third Bancorp and US Bancorp climbed 7.7% and 6.8%, respectively. First Republic Bank, though, which got a $30 billion rescue last week, plunged another 14% after losing a third of its value on Friday.
Banks were the best performers in European stocks from late September through the end of February, as rising interest rates in a still-growing economy bolstered the profitability of lending. Sentiment started turning sour on March 9 as Silicon Valley Bank collapsed, followed by the meltdown in shares of Credit Suisse last week.
The Stoxx 600 banks index has slumped 16% since it closed at a five-year high on Feb. 28. The index is headed for its biggest monthly drop since March 2020.
Meanwhile, the European Central Bank, Federal Reserve and four other central banks announced coordinated action Sunday to boost liquidity in US dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.
The wipeout of the AT1 bonds raised concern that banks will need to find new sources of capital if there’s a loss of confidence in those securities, while lenders’ existing holdings of such debt issued by peers also may see a significant loss of value. More broadly, the takeover of the 166-year-old Swiss lender initially added to investor jitters following the failures of Silicon Valley Bank and Signature Bank in the US this month.
The turmoil is now raising fears of a widespread fallout in the economy. Stress in the banking system is likely to curb the availability of credit, squeezing growth out of the economy, Michael Wilson, Morgan Stanley’s chief US equty strategist, said in a report.
“The UBS acquisition of CS in our view eliminates immediate sector tail risks, but it also raises questions,” Jefferies Financial Group Inc. analysts including Flora Bocahut wrote in a note. Credit Suisse’s AT1 bonds written off to zero could spook holders of these types of securities at other banks, they wrote.
--With assistance from Farah Elbahrawy, Hannah Benjamin-Cook and Julien Ponthus.
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