CRZBY Commerzbank Ag (PK)

By Ed Frankl

European banking stocks tumbled on Monday after UBS Group AG agreed to buy its crosstown peer Credit Suisse Group AG in a government-brokered deal that rattled the wider sector after it wiped out the latter bank's riskiest bonds.

At 0815 GMT, shares in UBS were down 13.3% to CHF14.83, while Credit Suisse shares dived 63% to CHF0.69.

Elsewhere, Deutsche Bank AG fell 10%, Commerzbank AG sank 7.7%, BNP Paribas SA was down 7.6%, Societe Generale SA fell 6.6%, ING Groep NV slumped 9% and Banco Santander SA slipped by 6.1%.

It was hoped that the 3 billion Swiss franc ($3.24 billion) deal, the largest between two major banks since the 2008 financial crisis, would halt a decline in confidence in the sector that had dragged shares last week.

The Swiss National Bank said it would provide CHF100 billion in liquidity to support the shotgun takeover, while the country's government would backstop up to CHF9 billion some losses UBS may incur.

While Credit Suisse shareholders will get around CHF0.76 a share as part of the deal--versus a share price of CHF1.86 at close of trading on Friday--the takeover wipes out CHF16 billion in Credit Suisse's riskiest bonds, known as additional Tier 1 bonds, threatening the stability of a market for similar European bank debt worth around a quarter of a trillion dollars.

AT1 bond costs may rise, deposit guarantee scheme limits may be reviewed, with additional operational expenses to banks, and banks may need to hold more liquid assets as a reaction to the deal, Citi analysts said in a note.

However, in the immediate future, the tie-up should relieve some pressure on the sector that contagion is avoided, though in the medium and longer term, events of the past week will add to a higher sector cost of equity, with banks needing to recognize the higher risks shareholders may be taking in investments, they said.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

March 20, 2023 04:53 ET (08:53 GMT)

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