10 min read I Date: 20 March 2023
Union Bank of Switzerland to takeover Credit Suisse
UBS to buy Credit Suisse 1
The Swiss Financial Market Supervisory Authority (FINMA), on March 19, 2023, approved the merger of Union Bank of Switzerland (UBS) and Credit Suisse, two of the global systemically important financial institutions (G-SIFIs). UBS agreed to purchase Credit Suisse in an all-equity transaction for about CHF 3 billion in UBS common shares.
Support from Swiss policymakers 2
- FINMA, The Swiss National Bank (SNB) and the Federal Council of the Swiss Confederation all took active part in the discussions and decisions that led to the sale of Credit Suisse. The Swiss Government provided substantial financial support as part of this sale.
- In its release FINMA stated that this support “will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of nearly CHF 16 billion.” This is only the second write-down of AT1 securities of a European bank, the first and only other being Banco Popular EspanolSA in 2017.
- FINMA said that to facilitate Credit Suisse’s sale to UBS, “further liquidity assistance will be assured” by the SNB and Swiss Federation. The regulator further stated that “the liquidity provided by the SNB will include a loan covered by a federal guarantee. The Swiss Confederation will also provide guarantees for potential losses of certain assets that UBS will acquire as part of the transaction, if these losses exceed a specific threshold.” UBS will receive CHF 9 billion of protection “in case of losses extending beyond the first CHF 5 billion which would be borne by UBS” for non-core assets.
UBS to emerge stronger 2
The write-down of Credit Suisse’s CHF 15.8 billion of AT1 securities by FINMA will strengthen its core capital. Assuming completion of the merger UBS has stated that its CET1 capital will be significantly above its 13% target range. (Please refer to the Appendix on the definition of various type of bank capital.)
Any impact on our funds? 3
In light of the recent Credit Cuisse AT1 bond write-down, it is worth noting that our internally managed fund was not exposed to the affected name. While we may see volatility in the bond market, we want to assure our investors that this will not be driven by any portfolio factors, but rather broad market sentiment.
As for our feeder/external funds, we have liaised with the external fund providers to determine which of our funds have an exposure to Credit Suisse. There are four funds that have exposure to the affected name. However, we want to emphasize that the exposure is marginal, with less than 1% of the total fund's holdings invested in this name. Our findings are summarised below.
Table 1: Funds that have exposure to Credit Suisse
|Fund Name||External Portfolio Manager||% Portfolio Exposure to Credit Suisse securities||Remarks|
|Principal Global Income Fund||Alliance Bernstein||0.49% in CS AT1 bonds as of 28/2/2023||Stated exposure is out of 5.52% exposure in banks and 13.12% in financials.|
|Principal Global Multi Asset Income Fund||JP Morgan||0.17% in preferred bonds (0.04% in AT1 CoCos + 0.14% in Senior bonds) as of 28/2/2023||Note: Breakdown does not tally due to rounding.|
|Principal Global Titans Fund||-||Indirect Exposure: 0.02% from holding MSCI Europe ETF as of 16/3/2023||Currently no active fund exposure. Stated exposure is out of 10.18% exposure in financials as of 14/3/2023.|
|Principal Preferred Securities Fund||-||1% in AT1CoCos as of 28/2/2023||Stated exposure is out of 49.3% exposure in banks and 50.5% in financials.|
|Update: 0% exposure to CS as of 18/3/2023||Update: Exposure to CS across all of Spectrum’s AUM is 0.01% as of 18/3/2023.|
Source: PAM compilation, 18 March 2023
Investment Strategy 3
- As is already unfolding, bonds are positioned to provide risk mitigation during periods of volatility and risk.
- The negative correlation between stocks and bonds has reasserted itself, and the diversification benefit of fixed income has been restored.
- In this aspect, Malaysia's fixed income offer attractive yields within the investment grade space. This can provide a steady source of income for investors and potentially help to offset any losses from equity investments.
- Our fixed income investment strategy continues to lean towards high quality corporate credit, as we believe that it offers better returns and is less prone to market volatility. In terms of duration, we intend to focus on medium duration and would gradually expanding the duration band as we identify opportunities in the market. This approach will enable us to strike a balance between achieving higher returns and managing risks associated with longer duration investments.
- On equity, we like prefer Asia to the rest of the world. Going forward will maintain lower exposure to cyclical sectors. Focus will be on quality names with attractive valuations, and ability to preserve margins and market share via pricing-power.
|Type of capital||Composition||Remarks|
|Tier 1 Capital (CET1)||Consists of the bank’s core capital (i.e.) Shareholders’ equity and the disclosed reserves (retained earnings) less goodwill, if any. It indicates the financial health of the bank. It consists of all reserves and funds of the bank. It acts as primary support in the case of the absorption of losses. It appears in the bank’s financial statement.||
Under Basel III, they need to maintain a minimum of 7% risk-weighted assets in Tier 1 capital. Plus, banks also have to hold an additional buffer of 2.5% of risky assets. Risk-weighted assets indicate the bank’s exposure to credit risk from the loans provided by the bank.
Tier 1 Capital must be more than the joined Tier 2 and Tier3 Capital.
|Tier 2 Capital||Consists of funds not disclosed in the financial statements of the bank. It includes revaluation reserve, hybrid capital instruments, subordinated term debt, general provisions, loan loss reserves, undisclosed reserves, fewer investments in unconsolidated subsidiaries, and other financial institutions.||Tier 2 capital is additional capital as it is less trustworthy than Tier 1. It is difficult to measure this capital as the assets in this capital are not easy to liquidate. Banks will divide these assets into the upper and lower levels based on the individual assets’ liquidity.|
|Tier 3 Capital (AT1)||Tier 3 Capital is tertiary capital. It is there to shield the market risk, commodity risk, and foreign currency risk.||It includes more subordinated issues, undisclosed reserves, and loan loss reserves compared to tier 2 capital.|
Source: PAM compilation, 19 March 2023
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- FINMA, 19 March 2023
- Bloomberg, SNB, FINMA, 20 March 2023
- PAM, PGI view, 20 March 2023