"Even After the Merger, Challenges Persist"…Authorities Struggle with Handling the 'Second Lehman Trigger'

Swiss financial authorities are grappling with how to handle Credit Suisse (CS), which has overcome a critical phase through an emergency capital injection. Options on the table include a high-intensity restructuring plan akin to corporate dismantling and a merger and acquisition (M&A) plan with a competitor. However, strong opposition from the merger parties, concerns over merger synergies due to overlapping businesses, and antitrust issues have raised significant skepticism, leaving the future uncertain.

On the 16th (local time), Bloomberg reported, citing sources, that both CS and its competitor UBS opposed the authorities' scenario of forcibly integrating the crisis-hit CS with UBS. UBS's reluctance to acquire CS stems from distrust in CS's investment banking (IB)-centered business structure, which has suffered massive losses. Foreign media pointed out, "The fundamental problem of CS lies not in liquidity but in a business model that fails to generate profits."

The market is placing the greatest weight on the merger plan, judging that CS will lose its viability amid ongoing net asset outflows and customer attrition. JP Morgan predicted that the most likely outcome is UBS acquiring CS. It was reported that among various options raised during a recent meeting between financial authorities and CS management, integration with a competitor was the most seriously considered.

The scenario involves the authorities purchasing CS shares through a capital increase to become the largest shareholder, then pursuing a third-party sale. In line with this, there was also discussion of UBS selling part of its stake in CS's retail banking division and using some of the proceeds to cover restructuring costs.

[Image source=AFP Yonhap News]

Even if the merger is completed, challenges remain. Bloomberg pointed out that even if a merger between CS and UBS occurs, it will be difficult to avoid antitrust controversies arising from the union of two giant banks. Considering that the merger parties oppose the deal, and that forced integration by the authorities will lead to conflicts among employees over workforce reductions in overlapping business areas, a difficult integration process is inevitable. There are also forecasts that additional capital adequacy regulations, such as raising the capital adequacy ratio, may follow to ensure the merged entity's smooth market landing.

Bloomberg emphasized that handling CS is not simply a merger between competitors but is directly linked to restructuring the Swiss financial industry and restoring lost external credibility, thus requiring careful management.

Some voices argue that urgently dispersing debt risk through corporate spin-offs is necessary. Boutique investment bank KBW (Keefe, Bruyette & Woods), headquartered in New York, acknowledged that the authorities' emergency liquidity measures can buy CS some survival time but warned that delayed follow-up actions could be fatal to the bank, proposing swift corporate spin-offs as a solution.

US financial investment information firm Morningstar also viewed the $4 billion raised from external investors at the end of last year as merely a stopgap measure given the current financial situation, suggesting that risk management through corporate spin-offs would be a fundamental alternative. Morningstar diagnosed that corporate spin-offs are inevitable due to CS's excessively high funding costs caused by its lowered credit rating.

[Image source=Reuters Yonhap News]

Bloomberg, citing sources, reported that considering various obstacles, a merger between the two companies would be regarded as a last resort. Authorities are currently considering various options, and it remains to be seen what additional measures will be taken following the announcement of a 50 billion Swiss franc (approximately 70.74 trillion KRW) liquidity support on the same day.

CS plans to focus immediately on a turnaround (return to profitability) based on the 70 trillion won inflow supported by the authorities. CS suffered a net loss of 7.29 billion Swiss francs (approximately 9.98 trillion KRW) for the entire last year due to customer attrition and investment losses. This loss amount is the largest since the global financial crisis in 2008. CS also forecasted that it is likely to incur losses in the IB and asset management divisions in the first quarter of this year and expects to remain in the red for the full-year performance.