UBS is to acquire troubled Credit Suisse for 3 billion Swiss francs ($3.2bn), the Swiss international banking groups said on 19 March.

The combination is expected to create a business with more than $5trn in total invested assets and sustainable value opportunities, UBS said in a statement yesterday. 

It will "further strengthen UBS's position as the leading Swiss-based global wealth manager with more than $3.4trn in invested assets on a combined basis, operating in the most attractive growth markets".

The transaction reinforced "UBS's position as the leading universal bank in Switzerland", it said, while the combined businesses "will be a leading asset manager in Europe, with invested assets of more than $1.5trn".

UBS chairman Colm Kelleher said: "This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure. 

"Acquiring Credit Suisse's capabilities in wealth, asset management and Swiss universal banking will augment UBS's strategy of growing its capital-light businesses. The transaction will bring benefits to clients and create long-term sustainable value for our investors."

UBS chief executive Officer Ralph Hamers said: "Bringing UBS and Credit Suisse together will build on UBS's strengths and further enhance our ability to serve our clients globally and deepen our best-in-class capabilities. The combination supports our growth ambitions in the Americas and Asia while adding scale to our business in Europe, and we look forward to welcoming our new clients and colleagues across the world in the coming weeks."

The discussions were initiated jointly by the Swiss Federal Department of Finance, FINMA and the Swiss National Bank and the acquisition has their full support, UBS further said.

Under the terms of the all-share transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share for a total consideration of CHF 3 billion. 

UBS benefits from CHF 25 billion of downside protection from the transaction to support marks, purchase price adjustments and restructuring costs, and additional 50% downside protection on non-core assets.

Both banks have unrestricted access to the Swiss National Bank existing facilities, through which they can obtain liquidity from the SNB in accordance with the guidelines on monetary policy instruments.

The combination of the two businesses is expected to generate annual run-rate of cost reductions of more than USD 8 billion by 2027.

UBS Investment Bank will reinforce its global competitive position with institutional, corporate and wealth management clients through the acceleration of strategic goals in Global Banking while managing down the rest of Credit Suisse's Investment Bank.

The combined investment banking businesses accounts for approximately 25% of Group risk weighted assets.

UBS anticipates that the transaction is EPS accretive by 2027 and the bank remains capitalized well above its target of 13%.

Colm Kelleher will be Chairman and Ralph Hamers will be Group CEO of the combined entity.

The transaction is not subject to shareholder approval. UBS has obtained pre-agreement from FINMA, Swiss National Bank, Swiss Federal Department of Finance and other core regulators on the timely approval of the transaction.

The Bank of England was among central bankers around the world responding to the backdrop of the deal, saying yesterday: "We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability.

"We have been engaging closely with international counterparts throughout the preparations for today's announcements and will continue to support their implementation. The UK banking system is well capitalised and funded, and remains safe and sound."

In early reaction, Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: ‘'Credit Suisse was on life support and Swiss authorities believed only a full transplant of the banks divisions into UBS would restore stability to the banking system.

"But an operation of this magnitude is a big risk for UBS - that's why it was only willing to pay $3.23 billion, less than half the price its shares valued the bank at on Friday. It will not only have to accept the healthier parts of the business but its failing ones as well - particularly its investment division, which has been mired in crisis after crisis. UBS will now be looking to chop up and sell off big chunks of operations, to slim down in size, given that the combined balance sheet is twice the size of Switzerland's economy.

"The speed at which the 167-year-old institution deteriorated, when it was previously deemed too big to fail, has rocked the banking sector. As the shockwaves continue to ripple central banks have taken rear guard action to reduce the risks of contagion.

"They've co-ordinated currency swaps to enable the smooth flow of money around the world, to ensure financial institutions can easily tap into the dollars they need to operate."

She continued: "Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next. Focus is shifting to the implications of high-risk bond holders in banks, after holders of more risky Credit Suisse debt saw their investment wiped out, as under the deal those additional tier 1 bonds were valued at zero.

"In bankruptcy proceedings, bond holders are higher up the queue than shareholders, but under the contracts signed the same rules don't have to apply given Credit Suisse was facing a clear viability issue and had already been given support from the central bank.

"It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over. Shares in Standard Chartered and HSBC listed in Hong Kong fell by 7% after immediate relief at the Credit Suisse deal evaporated. Smaller lenders will be in focus again, particularly in the US, after First Republic Bank shares tanked by more than 30% despite the $30 billion lifeline given to it by large US banks. 

"Bigger lenders are still considered to be much better insulated from the chill winds still blowing through the banking sector. They have built up much bigger capital cushions since the financial crisis, have more stable deposits, and some are seeing greater inflows of cash as companies and individuals seek out safer havens to put their money. They are also much less likely to have to sell off bonds, they may have a paper loss on right now, but instead will be able to hang onto them until they mature. 

"But as risk aversion grips the sector, the worry is that overall banks will become more cautious in their lending, which could be another blow for already fragile housing markets in particular. Worries are rattling investors about what repercussions a potential lending squeeze will have on the global economy. The weaker oil price reflects this, with Brent Crude dropping more than 2% to $71 a barrel, its weakest level since December 2021."