eliminates immediate tail risks in the banking sector, argues analysts at Jefferies, but it also raises questions.
However, in terms of sector ramifications, while this deal significantly reduces the immediate systemic risk from CS’ weaknesses, we think two key negatives elements will also catch the eye: that CS’ AT1 holders are wiped out whereas shareholders are not entirely, though normally more junior in creditworthiness, and that shareholder approval was not asked on UBS’ side for this deal.
The low price paid and significant safety net provided to UBS are positive, while UBS’ strategy is unchanged. However, UBS embarks significant execution risk, litigation risk, the buyback is temporarily suspended , UBS’ capital requirement is likely to be revised up, and management focus will be captured by this deal for many quarters, maybe years.The turmoil in the banking sector may deter the Bank of England from raising borrowing cost again this week.