SHARES in UBS plunged on Monday (Mar 20), heading for their biggest one-day fall since 2008, after its weekend rescue of ailing rival Credit Suisse ignited concerns among investors about the long-term benefits of the deal.

UBS, with a hefty backstop from Swiss authorities, agreed to buy Credit Suisse on Sunday for just a fraction of its market value, in a package orchestrated by Swiss regulators.

The bank will pay three billion Swiss francs (S$4.3 billion) for Credit Suisse, and assume up to US$5.4 billion in losses.

Shares in UBS fell by as much as 16 per cent in early Monday trading, the most since September 2008. They were last down 15 per cent at 14.47 Swiss francs. Since the start of March alone, they have lost almost 30 per cent in value, and are set for their largest monthly loss since September 1998.

Johann Scholtz, analyst at Morningstar, said that the acquisition should ultimately benefit UBS.

“A week can be a very long time in financial markets. UBS acquiring Credit Suisse for three billion Swiss francs a week ago would have seemed like a terrific deal. Now the position is less clear,” he said.

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“Credit Suisse likely experienced significant net outflows of client assets last week, eroding its revenue base. We, however, believe that UBS can extract value from the acquisition. It is in a much better position to execute a radical restructuring of Credit Suisse’s business than Credit Suisse was,” Scholtz added.

Credit Suisse shares slid by more than 60 per cent to around 0.69 Swiss francs, while the value of its additional tier 1 (AT1) bonds – a type of bond issued by banks that make up the capital buffers that regulators require them to hold – dropped as low as US$0.01 on the dollar.

The Swiss regulator demanded that Credit Suisse write down 16 billion Swiss francs worth of the debt to zero as part of the merger deal, angering bondholders.

A US$1 billion AT1 bond with a coupon of 4.5 per cent was bid as low as US$0.01 on the dollar, Tradeweb pricing showed.

“The next few hours of trading will give us a better picture on whether the crisis is contained,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said.

“In theory, there is no reason for the Credit Suisse crisis to extend, as what triggered the last quake for Credit Suisse was a confidence crisis, which doesn’t concern UBS – a bank outside the turmoil, with, in addition, ample liquidity and guarantee from the Swiss National Bank and the government.”

At Friday’s close, Credit Suisse had a total market value of US$8 billion. Just six months ago, it was worth US$13 billion.

JPMorgan said that although UBS stood to gain in the long term from the deal, the write-down of the AT1 bonds would impact other European banks.

“We believe this AT1 write-down by a systemically important bank will have negative implications for the wider European Banks’ AT1 market, as well as overall funding profile and cost of equity for the Banks,” JPMorgan strategists Kian Abouhossein and Amit Ranjan said in a note on Monday.

An index of European banking shares tanked on Monday, losing more than 4 per cent, as shares in the likes of Deutsche Bank, Commerzbank, Societe Generale and BNP Paribas dropped between 5.5 per cent to 7.5 per cent. REUTERS