Swiss traumatised as UBS eats rival live on telly in horrifying scenes in Bern, then initiates coverage of mid cap US banks

What a terrific weekend of crisis it’s been both at the summit of Swiss political power and in the dark and secret situation rooms of the twin Swiss banking giants – Switzerland’s children – UBS and Credit Suisse.

There was movement at the station on Sunday, when according to the Financial Times, some rather intense, most likely fraught negotiations were under way in Bern as UBS was told to go make itself useful and take over all or part (probably any) of its sibling and smaller hometown rival Credit Suisse.

A lot has happened in the few hours I’ve been writing this, so rather than bore you with fabulous detail, here’s the trailer:

(Like the recent Oscar winner, it’s just the bits so you know what happens in the end:

UBS is acquiring CS for US$3.2 billion
T’is the largest bank merger in Europe since the 2008 gnarly financial crisis.
Beset Swiss President Alain Berset confirmed Sunday night the forced marriage between Credit Suisse and its larger sibling UBS
The rushed merger is an effort to avoid further market-shaking turmoil in global banking
Christian, (this writer), while not having played a firsthand role in recent global banking M&A per se, suspects that the more you rush, force and cajole in order to achieve a specific purpose, the more unlikely that purpose will be achieved
There’s probably an equation for the above
Fortunately the ECB has welcomed the sterling action of the Swiss
As the news Credit Suisse would be subsumed by its larger rival, Christine Lagarde led the cheers as Switzerland began to mourn.
The UBS offer, equivelant to circa 3 billion Swiss francs is being sheparded by JPMorgan (I feel safer already)
Swiss Finance Minister says ‘top goal was to protect the Swiss financial system and our economy (oh… and also the global financial system)’
Swiss gov’t offers its own central bank (SNB) a default guarantee for liquidity
Berset says the takeover is the best solution to amp up some confidence in the Swiss financial system
SNB says ‘the substantial provision of liquidity will ensure that both banks have access to the necessary… er… liquidity’
Credit Suisse Chair says all this is unfortunate but largely caused by the Americans
UBS chairman Colm Kelleher says takeover “attractive” for UBS shareholders, but calls it “an emergency rescue”.
Kelleher says UBS will wind down the CS investment banking arm

Blowback

While markets might be relieved at this unlikely attempt of an abrupt epilogue, the Swiss are not.

Swiss regulators are trying to calm the market, but the trauma has spread already into the general populace.

Half of Switzerland has woken up with some form of PTSD having watched the pride of the national banking sector, a very pillar of global finance, disgrace itself before being eaten by its own brother live on weekend telly.

Florian Fischbacher writing in Le Temps, called the takeover of Credit Suisse by UBS, the “unworthy end of an icon, which has led to the birth of a monster.”

The Neue Zürcher Zeitung called it a “black day”.

For the Tages-Anzeiger it’s a “historic scandal”.

“A redemption of shame” for 24 Hours.

And La Tribune de Genève : everyone is just freaking out.

The hard truth is 167 years after its creation, the bank will be swallowed up by its great rival, with the connivance of the Federal Council (Cabinet) and the Swiss National Bank (SNB).

A 167-year train off the tracks

Credit Suisse has been on the verge of leaving the train tracks altogether.

It was a tough week to say goodbye, which kicked off with a humiliating emergency rescue of 50 billion Swiss francs (US$53 billion) from the Swiss National Bank (SNB) in to deal with its awful liquidity crisis. It wasn’t enough and only seems to make everyone without a different Swiss bank account very nervous. To emphasise what a basket case it can be, CS shares hit an ill-timed, all-time low. This on the back of another well-timed milestone – the largest single session decline in its share price history of 160+ years (that was circa -24.5% on Wednesday).

Then of course there’s been the habitual loss-making, whack management and the string of scandals like, let’s choose one, money laundering charges.

But, in the wake of the 2008 financial crisis, reforms led to the creation of a global top 30: banks of “systemic” importance, institutions deemed essential to the good health of the international financial system.

Credit Suisse is – or was – among the 30 financial institutions which have stricter scrutiny, higher capital requirements and simply could not be allowed to tank.

First founded as “Schweizerische Kreditanstalt” in 1856 by wild man industrialist Alfred Escher, Credit Suisse was at first just a handy way for Escher to finance his own pursuits – in this case, the development of Switzerland’s wonderfully complex rail network which succeeds doing many times a day what Hannibal could only do once and with far fewer elephants – finding its way through the Alps.

It was at the time, and in standing with Escher’s confidence, an incredibly high-risk venture for an untested business in a loss-making industry.

Sound familiar?

Well. It should be exciting to see exactly how European markets intend to resume their downward spiral – with Latin passion, revolutionary zeal, or with a quiet determination to just carry on.

A big bag of bank stock opportunity

UBS, utterly po-faced, also knows its way round a banking crisis.

Rather than get caught up in what’s happening at home, the bank just told clients it’s going to start weighing the look of some mid cap American banks.

There’s money to be made. With the Nasdaq Bank Index trading at 7x 2yr Forward P/E, which is three standard deviations below average, UBS says it has initiated coverage on no less than 19 US mid cap banks.

They start the week stateside with five buys (Western Alliance, NY Community Bank Corp, Webster Financial, Comerica and Bank OZK) 10 Neutrals; and four sells.

Western Alliance (WAL) is their No #1 draft pick.

UBS view WAL’s exposure to more volatile tech and innovation deposits as manageable and reckon the bank’s credit profile is “fundamentally misunderstood”, which is a round about way of saying ‘we like it anyway’.

UBS also think NY Community Bank (NYCB) is a name to own in the Big US bag of bank stock opportunities. NYCB has what UBS reckon is a sustainable +10% dividend yield and low 0.75x Price to Tangible Book Value (TBV).

UBS are calling for a mild recession through the US in 2024, which will weigh on Net Interest Income (NII) as higher rates ensure deposit funding costs in the States (and pretty much everywhere else) remain elevated.