UBS Buys Credit Suisse And Creates A Real Estate Giant. Does A Credit Crunch Still Loom?

UBS has bought fellow banking giant Credit Suisse in a deal that will create a bank with an $80B commercial real estate loan book and more than $100B of real estate assets under management — making it the fourth-largest CRE lender in the world — but the key element of the deal for CRE is whether it can stop liquidity drying up in the banking system.

UBS announced on Sunday that it had agreed a deal to rescue Credit Suisse and would pay about $3.25B for its Swiss rival. Swiss financial regulators changed the law so that shareholders do not have to approve the deal, such was the need to get a speedy transaction completed.

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” UBS Chairman Colm Kelleher said in a press release announcing the deal.

Credit Suisse’s share price had continued to fall last Friday despite the Swiss government agreeing to provide it with $54B of loans to shore up its capital position. That is because depositors including wealthy private clients and big companies had continued to take money out of the bank as they were uncertain about its financial health.

That was the same problem faced by Silicon Valley Bank, and bank shares have dropped sharply across the world in the last week due to nervousness about whether other banks might also fail because depositors and corporate clients pull money for fear of losing it if a lender does collapse. 

That lack of trust in the banking system has the possibility to reduce liquidity and could spur banks to pull further bank on lending, keeping as much capital on their balance sheets to insure against further volatility, analysts and investment managers said in the wake of a turbulent week. A further contraction of lending would be negative for the CRE industry, which relies heavily on debt for investment.

A credit crunch could also exacerbate the slide in commercial real estate values that is already underway, Green Street said last week.

“It’s highly unlikely we’ll see a positive scenario, especially taking into account recent events,” Oria Garvey, Federated Hermes senior fixed-income portfolio manager, told the FT. “The issue will be if banks pull back from lending, which has historically had a large impact on growth. But that could be avoided if central banks and regulators step up.”

Regional banks in the U.S. have been a particular focus of concern, partly because of their high exposure to commercial real estate lending, which makes up 28% of their loan book compared to 8% at larger lenders, Federal Reserve data showed.

“More problems may yet emerge at other commercial banks in the U.S.,” Capital Economics said in a note on Friday. “But the industry there as a whole doesn’t have a worryingly high uninsured deposit ratio or unrealized losses on 'held-to-maturity' securities in excess of capital.

"And if more skeletons do emerge from the closet, this is more likely to be the case for banks that have been relatively lightly regulated because they pose less of a risk to the economy.”

Democratic Sen. Elizabeth Warren said on Sunday that the federal ceiling for insuring deposits at banks should be raised from the current limit of $250K and speculated it could go as high as $10M. That would mean larger corporate and wealthy individual deposit holders would be less likely to pull their money and create a run on a bank, as they would be comfortable that if a lender did fail their money would be insured. Warren also proposed legislation last week to repeal bank deregulation enacted during Donald Trump’s presidency.

The decline of Silicon Valley Bank was followed by that of Signature Bank, the third-largest real estate lender in New York, and on Friday other U.S. lenders provided more than $30B of liquidity to First Republic Bank, in a move that did not stop its share price from dropping further. 

A problem for some lenders, including SVB, is that they took customer deposits and invested the money in bonds. As interest rates have risen, the value of those bonds has dropped. When customers asked for their deposits back, they didn’t have the money to give back to them. 

Credit Suisse’s problems go back further, and include a decade of fines for regulatory failures and a slow loss of confidence from wealthy customers.

The financial world is now trying to work out if these failures are isolated or part of a wider pattern. And while that analysis is being undertaken, lending is likely to be scaled back.

“While a 2008-09 banking crisis is not going to arrive  ... [banks’ decision to extend less credit supports] the argument that the economy is more likely to slow than advance in the coming months,” TS Lombard Economist Steven Blitz said in a note last week. 

As for a combined UBS and Credit Suisse, the bank will have a commercial real estate loan book in the region of $80B, according to an analysis of financial filings by Bisnow. UBS has about $47B of CRE lending on its balance sheet and another $8B off balance sheet, its 2022 annual report showed.

Credit Suisse has about $25B in CRE lending, its annual report said. That combined $80B would make it the fourth-largest CRE lender in the world, vying with Bank of America for the No. 3 slot, according to a ranking compiled by American Banker magazine. One caveat is that list does not include Chinese banks likely to have huge CRE lending portfolios. Wells Fargo and JP Morgan are the top two. 

The combined asset management business of the two banks will have more than $100B of real estate assets under management. Credit Suisse Asset Management had $62B of real estate AUM as of June. UBS does not provide such a specific breakdown, but its real estate and private markets fund management business has more than $100B in assets under management, more than half of which are likely to be in real estate. 

Credit Suisse Real Estate Fund International, a $3.5B real estate fund, has some of its largest holdings in Boston; Austin, Texas; and Vancouver, Canada. 

Last month, Credit Suisse began limiting withdrawals from the fund after investors holding about 13.3% of the fund’s shares requested to pull out cash after their valuations were hit by rising interest rates. 

The fund had been down about 5% in the past five years and was expected to drop another 10%.

— Maddy McCarty contributed reporting to this story.