(Bloomberg) — European banking stocks slumped Monday as investors reeled from the historic weekend takeover of Credit Suisse Group AG that will wipe out a class of bondholders.
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Under the terms of UBS Group AG’s acquisition of Credit Suisse, holders of securities known as additional tier 1 bonds will be wiped out, potentially sending the $275 billion market for bank funding into a tailspin. UBS shares fell 8.6% while Credit Suisse plunged 58%.
That’s raising concern that banks will need to find new sources of capital if there’s a loss of confidence in those securities, while lenders’ existing holdings of such debt issued by peers also may see a significant loss of value.
AT1 bonds issued by European banks lost as much as 10 percentage points of face value early Monday. An exchange-traded fund that invests in the securities, Invesco AT1 Capital Bond UCITS ETF, plunged 17% in London trading.
More broadly, the takeover of the 166-year-old Swiss lender is only adding to investor jitters following the failures of Silicon Valley Bank and Signature Bank in the US this month. The Stoxx Europe 600 Banks Index slipped 1.9% at 10:11 a.m. in Paris, led by ING Groep NV and Deutsche Bank AG, while US banks fell in premarket trading.
“You’ve got a nasty deal with a long and uncertain execution,” said Mikael Jacoby, head of continental European sales trading at Oddo Securities in Paris. “In the banking sector, maybe some bottom fishers will buy stocks deemed as safe but globally it will be negative.”
All 44 stocks in the Stoxx 600 bank index fell, with ING declining 5.0% and Deutsche Bank sinking 4.1%. In Hong Kong trading, HSBC Holdings Plc tumbled 6.2%, the most since September 2022, and Standard Chartered Plc slumped 6%.
Wall Street’s biggest lenders fell in US premarket trading, with JPMorgan Chase & Co. shares dropping 1.6% and Wells Fargo & Co. declining 2.6%. Bank of America Corp. lost 2.1% and Citigroup Inc slipped 1.8%. First Republic Bank, which got a $30 billion rescue last week, plunged 20% after losing a third of its value on Friday.
“What is certain is that there will be ripple effect from the Credit Suisse deal to the bond and equity market and we don’t know yet how much exposure international and regional banks have,” said Dickie Wong, director of research at Kingston Securities Ltd.
Banks were the best performers in European stocks from late September through the end of February, as rising interest rates in a still-growing economy bolstered the profitability of lending. Sentiment started turning sour on March 9 as Silicon Valley Bank collapsed, followed by the meltdown in shares of Credit Suisse last week.
The Stoxx 600 banks index has slumped 20% since it closed at a five-year high on Feb. 28.
Meanwhile, the European Central Bank, Federal Reserve and four other central banks announced coordinated action Sunday to boost liquidity in US dollar swap arrangements, the latest effort by policymakers to ease growing strains in the global financial system.
The turmoil is now raising fears of a widespread fallout in the economy. Stress in the banking system is likely to curb the availability of credit, squeezing growth out of the economy, Michael Wilson, Morgan Stanley’s chief US equty strategist, said in a report.
“The UBS acquisition of CS in our view eliminates immediate sector tail risks, but it also raises questions,” Jefferies Financial Group Inc. analysts including Flora Bocahut wrote in a note. Credit Suisse’s AT1 bonds written off to zero could spook holders of these types of securities at other banks, they wrote.
–With assistance from Farah Elbahrawy and Charlotte Yang.
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