Credit Suisse’s rescue reinforces the trend to national champion banks

In the months leading up to Credit Suisse’s rushed rescue by UBS, European bank investors were increasingly moving towards banks based on large domestic market shares. These national champions have typically seen most benefits from higher interest rates in Europe: names such as CaixaBank, Lloyds Banking Group, NatWest and even Commerzbank.

By contrast, firm like BNP Paribas and Santander – and the big Swiss banks – have benefited less, due to their bigger international businesses, including in corporate and investment banking and wealth management.

So how does UBS’s takeover of Credit Suisse fit into this trend?

Especially in the short term, the deal makes for a much more complicated institution. This sort of complexity is one of the main reasons why investors have tended more to buy simpler, domestic-focused institutions over the past decade.

The prospect of all that complexity is also a large reason why UBS had not previously made a move on Credit Suisse.

But in important respects, the merger will reinforce the trend towards national champion banks, both in the lessons that the industry will learn from the rescue and ultimately from its creation of a bank that will eventually be more grounded in Switzerland than before.

It was, indeed, the international business that primarily led Credit Suisse into trouble, thanks to its large exposures to events outside Switzerland such as the Archegos and Greensill scandals.

Added to that, the archetypal emerging-market billionaire clientele for which Credit Suisse was known may tend to be quicker to take out their money than Swiss retail depositors. That may have been another way in which its international business precipitated its rescue.

Credit Suisse’s large emerging-market wealth and investment-banking businesses previously made it part of a vogue for internationally diversified institutions in the late 2000s and early 2010s, alongside banks such as Santander and HSBC.

After the mid 2010s, investors turned to liking simpler and more nationally focused firms, partly because of implicit regulatory preference.

Now, the spectre of another national bailout will reinforce this regulatory preference, because it once again shows that the home-country taxpayer is ultimately on the hook, whatever the global nature of the business and its problems.

If governments are putting up local taxpayer money, they will want to protect the local banking sector, not the banking sector of other countries.

(Within the European Union, it would not be much different, as there is not even any common deposit insurance.)

Meanwhile, in the short term, the volatility around Credit Suisse makes cross-border M&A less likely, in the sense that banks are hardly going to take big risks in this environment if they don’t have to.

That could mean that UniCredit, for example, gets even better terms if talks reopen on a purchase of state-owned Banca Monte dei Paschi di Siena, while French group Crédit Agricole would now be even less likely to take the plunge, despite its Italian presence.

More fundamentally, however, the deal underlines the idea that bank CEOs won’t – and perhaps shouldn’t – engage in large M&A deals unless they can get the target almost for free, much as Santander did with Banco Popular in 2017.

Switzerland has indeed given UBS some attractive terms for the Credit Suisse takeover, including the cancellation of the latter’s additional tier-1 debt (like in the Popular deal) and other state-funded risk-sharing and liquidity guarantees.

Would it have been politically palatable to extend the same sort of state support to a foreign buyer? Probably not.

Think back to Intesa Sanpaolo’s largely state-funded takeover of two banks in Italy’s Veneto region in 2017, a deal Intesa styled as in the national interest – as well as its own. That deal reinforced Intesa’s status as an Italian national champion.

This is not just about patriotism. Foreign takeovers could work less well for reasons of global financial stability, too. If it is less obvious which state is responsible, it could make state-backed banking rescues harder.

Even if UBS was to a large extent forced into this, it was able to negotiate a better deal for Credit Suisse because of the lack of Swiss alternatives. It is buying Credit Suisse with shares worth a total of SFr3 billion ($3.2 billion), for a bank whose market capitalization was more than three times that amount less than a week earlier. That is aside from the SFr16 billion AT1 wipe-out and state downside protection.

Integrating and restructuring Credit Suisse will take years. And despite UBS’ suggestions to the contrary, much of Credit Suisse’s international business may not add much to that of UBS. Credit Suisse had a reputation for harbouring lower-quality wealth-management clients, while it played in areas of investment banking that UBS jettisoned long ago. UBS will want to get out of much of that.

The main bit of Credit Suisse that UBS will want to keep, however, is its Swiss business. Although Switzerland is a small economy, it is a rich one – especially for onshore wealth clients. Investors today are more aware than ever of how a strong local business can underpin a bank’s success, regardless of whether or not it has a large international business.

Perhaps this deal will end up something like Lloyds’ 2008 merger with HBOS – which had a horrific first few years but ultimately became a bank with a commanding share of UK retail banking, and cost synergies to match.

UBS will remain much more international than Lloyds, but it will be competing from a bigger – and hopefully stronger – Swiss base.