Credit Suisse rescue fails to calm banking market

Dusseldorf The emergency sale of the major Swiss bank Credit Suisse to its competitor UBS did not calm the markets on Monday. Deutsche Bank shares lost 8.5 percent at the start of trading, Commerzbank 6.5 percent.

Credit Suisse shares fell another 64 percent in Zurich to a record low of CHF 0.67. This is the biggest fall in the company’s history. UBS stocks fell 13 percent, the strongest since three years ago.

Analysts attribute the slump in bank shares primarily to the fact that in the course of the rescue of Credit Suisse, holders of equity-like bonds, so-called Additional Tier 1 bonds (AT-1), suffered a total loss. The papers with a nominal value of 16 billion Swiss francs are written down to zero.

The AT-1 bonds were introduced after the 2008 financial crisis. They are intended to form an additional buffer so that banks do not collapse so quickly in times of crisis. The securities are converted into shares or written off when a bank’s ratios fall below certain thresholds.

The Swiss financial market regulator Finma decided on Sunday evening that the papers at Credit Suisse would be completely written off. She justified this with the “extraordinary state support” in the course of the takeover by UBS.

The write-down at Credit Suisse is the largest on paper of this type to date. Overall, the market for AT-1 bonds in Europe is around 250 billion euros. Deutsche Bank’s exposure to Credit Suisse AT-1 bonds is “close to zero,” Germany’s largest bank said on Monday.

Depreciation surprises investors

So far, AT-1 bonds have only been written off once in Europe: when the Spanish Banco Popular was taken over by Banco Santander for one euro in 2017. However, the loss of 1.35 billion euros in AT-1 bonds went hand in hand with the complete write-off of equity.

As a rule, shareholders are the first to have their capital drained before bondholders take their turn. Credit Suisse recently highlighted this point in a presentation for investors. The announcement that Credit Suisse’s AT-1 bonds will be written off, but that shareholders will receive a purchase price of $3.25 billion, therefore surprised many market participants.

In principle, however, experts think it is correct that holders of AT-1 bonds now have to bear losses. “These bonds were made for moments like this. Kind of like cat bonds,” explained John McClain, portfolio manager at Brandywine Global Investment Management. Investors knew that this involved high risks.

Investors are concerned

The merger of UBS and Credit Suisse alleviates concerns that the crisis will spill over to other institutions, the analysts at Citigroup said. In the medium to long term, however, the rescue operation will lead to higher refinancing costs for banks.

“The deal has resulted in significant losses for some bondholders,” commented Marvin Chen, an analyst at Bloomberg Intelligence. “Investors in the region are likely to reassess their exposure to financial market turmoil and risk.”

As a result, bank stocks had already sold off in Asian stock trading. The stocks of HSBC were particularly under pressure, which fell by up to 6.6 percent in Hong Kong and were thus stronger than they had been in almost six months. The bank’s AT-1 bonds fell more than five cents. Standard Chartered fell as much as 5.6 percent in Hong Kong. The Japanese banking index slipped 1.9 percent. Hong Kong’s Hang Seng Index fell 2.7 percent.

With agency material

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