UBS terminates $10bn deal with Swiss government that helped in Credit Suisse merger

UBS Group has ended an agreement with the Swiss government to cover losses the bank could incur from the rescue of Credit Suisse, a sign that the mammoth integration is on track and the stricken lender’s assets might be less troublesome than initially feared.

Switzerland’s biggest bank said on Friday it had voluntarily terminated the 9 billion Swiss franc ($10.3 billion) loss protection agreement with the Swiss government after stress-testing a portfolio of Credit Suisse non-core assets.

UBS also said it will terminate a liquidity backstop with the Swiss National Bank of up to 100 billion francs, according to the statement, adding that Credit Suisse has also fully repaid a 50 billion franc emergency liquidity assistance loan.

The support had helped facilitate the takeover brokered by the government in March as Credit Suisse hurtled toward bankruptcy. UBS had pushed for protection from hard-to-predict losses from a set of its former rival’s assets it plans to wind down or sell.

“This is a testimony to the strength of UBS,” chief executive Sergio Ermotti and chairman Colm Kelleher said in an internal memo to staff. “We can manage the overall costs and financial impact of the integration on our own.”

UBS shares rose 4.35 per cent in early trade in Zurich.

The decision offers reassurance on “the health of the Credit Suisse non-core portfolio", Citigroup analysts said in a note. “The early voluntary repayment could potentially also help in other matters, such as negotiating the retention of the Credit Suisse Swiss business.”

The fate of the Swiss bank has been widely watched as Swiss-based companies and politicians have voiced concerns over the market power that the combined bank would exercise. UBS plans to make a decision in the third quarter on whether it will fully integrate it with its own Swiss unit or seek another option such as spinning it off or listing it publicly.

Terminating the various agreements will also save UBS millions in fees going forward. The bank had paid 40 million Swiss francs for the establishment of the loan protection agreement, while Credit Suisse had paid risk premiums in relation to the liquidity assistance measures.

Under the terms of the loss protection agreement, UBS was to assume the first 5 billion francs of losses, with the government stepping up to take on the next 9 billion francs. The portfolio of assets covered primarily loans, derivatives, legacy assets and structured products from Credit Suisse’s non-core unit.

"Expected losses from acquired Credit Suisse assets may be less than feared, with UBS eliminating a 9 billion franc backstop provided by the Swiss government as part of the deal, which was set to follow the first 5 billion francs of losses taken by the acquirer related to a specific portfolio," said Alison Williams, a banking analyst at Bloomberg Intelligence.

"The move indicates UBS’ confidence that worst-case losses are manageable, following stress testing of related non-core assets. Termination may also help politically, providing flexibility for the sizable combined Swiss business, while also saving expected annual fees related to the backstop."

The government had previously said it and the bank’s “priority” was to minimise losses and avoid using the loss backstop as much as possible. Swiss taxpayers no longer bear any risk relating to the rescue of Credit Suisse, Finance Minister Karin Keller-Sutter said at press conference on Friday.

The Swiss National Bank said in a statement it welcomed the repayment of the liquidity assistance measures.

UBS is due to give further details on the integration plans on August 31 when it reports combined second-quarter earnings. It flagged on Friday that more announcements are likely at that point.

“There will be many more milestones to come, and we will share some of these with you when we report our second-quarter results,” Mr Ermotti and Mr Kelleher said in the internal memo.

Four reasons global stock markets are falling right now

There are many factors worrying investors right now and triggering a rush out of stock markets. Here are four of the biggest:

1. Rising US interest rates

The US Federal Reserve has increased interest rates three times this year in a bid to prevent its buoyant economy from overheating. They now stand at between 2 and 2.25 per cent and markets are pencilling in three more rises next year.

Kim Catechis, manager of the Legg Mason Martin Currie Global Emerging Markets Fund, says US inflation is rising and the Fed will continue to raise rates in 2019. “With inflationary pressures growing, an increasing number of corporates are guiding profitability expectations downwards for 2018 and 2019, citing the negative impact of rising costs.”

At the same time as rates are rising, central bankers in the US and Europe have been ending quantitative easing, bringing the era of cheap money to an end.

2. Stronger dollar

High US rates have driven up the value of the dollar and bond yields, and this is putting pressure on emerging market countries that took advantage of low interest rates to run up trillions in dollar-denominated debt. They have also suffered capital outflows as international investors have switched to the US, driving markets lower. Omar Negyal, portfolio manager of the JP Morgan Global Emerging Markets Income Trust, says this looks like a buying opportunity. “Despite short-term volatility we remain positive about long-term prospects and profitability for emerging markets.”

3. Global trade war

Ritu Vohora, investment director at fund manager M&G, says markets fear that US President Donald Trump’s spat with China will escalate into a full-blown global trade war, with both sides suffering. “The US economy is robust enough to absorb higher input costs now, but this may not be the case as tariffs escalate. However, with a host of factors hitting investor sentiment, this is becoming a stock picker’s market.”

4. Eurozone uncertainty

Europe faces two challenges right now in the shape of Brexit and the new populist government in eurozone member Italy.

Chris Beauchamp, chief market analyst at IG, which has offices in Dubai, says the stand-off between between Rome and Brussels threatens to become much more serious. "As with Brexit, neither side appears willing to step back from the edge, threatening more trouble down the line.”

The European economy may also be slowing, Mr Beauchamp warns. “A four-year low in eurozone manufacturing confidence highlights the fact that producers see a bumpy road ahead, with US-EU trade talks remaining a major question-mark for exporters.”