10 min read    I     Date: 20 March 2023

Union Bank of Switzerland to takeover Credit Suisse

What happened

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

1. 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. 
    
2. 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.
    
3. 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

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.

Appendix

Source: PAM compilation, 19 March 2023

Disclaimer:
You are advised to read and understand the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) before Investing. Among others, you should consider the fees and charges involved. The registration of the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) with the Securities Commission Malaysia (SC) does not amount to nor indicate that the SC recommends or endorses the funds. A copy of the relevant Prospectus, Information Memorandum and/or Disclosure Document including any supplemental thereof and the Product Highlight Sheet (if any) may be obtained at our offices, distributors or our website at www.principal.com.my. The issuance of any units to which the relevant Prospectus, Information Memorandum and/or Disclosure Document relates will only be made on receipt of an application referred to in and accompanying a copy of the relevant Prospectus, Information Memorandum and/or Disclosure Document. Please be advised that investment in the relevant unit trust funds, wholesale funds and/ or private retirement scheme carry risk. An outline of the various risk involved are described in the relevant Prospectus, Information Memorandum and/or Disclosure Document. As an investor you should make your own risk assessment and seek professional advice, where necessary. Securities Commission Malaysia does not review advertisements produced by Principal.

Sources:

1. FINMA, 19 March 2023
2. Bloomberg, SNB, FINMA, 20 March 2023
3. PAM, PGI view, 20 March 2023