UBS shares storm back to the pre-SVB levels with post-deal surge

UBS Group AG shares have erased almost all of the losses made during the past week’s banking rout, with a bond buyback announced Wednesday adding to confidence that the historic takeover of Credit Suisse Group AG will be a net positive for the firm.

The Swiss lender is leading gains among European banks this week, as fears around the stability of the finance sector eased after the US$3 billion emergency takeover. Shares gained as much as 3,6 percent to 20.12 Swiss francs on Wednesday, while the company’s bonds recovered some of the losses taken in recent days.

The stock pared gains to trade flat at 19.39 francs as of 11:51 a.m. in Zurich, but is about 14 percent higher since the Sunday agreement brokered by the Swiss government. Bonds are up between 1-5 cents from Monday’s lows across the board.

The last-minute merger brokered by the Swiss government on Sunday has left investors racing to break down the implications for UBS, one of the world’s largest wealth managers. For now, the benefits in terms of potential cost-savings and dramatically improved market share are outweighing concerns about the complexity of integrating Credit Suisse and the risks on its balance sheet.

“Market sentiment seemed to have turned positive, with the risk of other European banks impacted by an outright failure of Credit Suisse subsiding,” said Johann Scholtz, an equity analyst at Morningstar Inc. “UBS’s gains yesterday reflect our view that this can be a favorable deal for UBS in the long term. In the short term, volatility should remain in the European banking space.”

US bank shares have also been stabilising from a selloff generated by troubles at regional lenders and the collapse of Silicon Valley Bank, following reassurances from Treasury Secretary Janet Yellen that the government could intervene to protect the broader US banking system.

“The biggest pressure point or danger is market participants conflating these events into a 2008 crisis narrative, when we do not view it as that at all,” said David Storm, chief investment officer for RBC Wealth Management.

Earlier Wednesday, the Swiss lender announced it is offering to buy back 2,75 billion euros worth of bonds it issued to investors just days before rescuing Credit Suisse.

Credit riskUBS’s credit risk has been jolted since concern over Credit Suisse’s fate, and the role UBS would play in it, roiled global markets. After the deal was announced, the cost of insuring UBS’s debt for one year soared to a record.

On Wednesday UBS’s credit default swaps fell further from Monday’s highs. Yet, UBS Group’s five-year CDS remain at elevated levels.

The buyback decision was a “reasonable action to give investors the option to sell back the bonds should they, having known what they know now, have chosen not to invest,” said Andrew Wong, a credit analyst at Oversea-Chinese Banking Corp.

UBS is taking a selective approach to the staff and assets it has inherited from Credit Suisse. The lender wants to cherry pick top dealmakers from Credit Suisse Group AG’s investment bank instead of supporting Michael Klein’s plan to build a new independent firm, according to people familiar with the discussions. – Bloomberg

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