Are European Banks in Trouble?

UBS's emergency buyout of Credit Suisse at a fraction of its value is intended to reassure the markets, but some worry it could just transfer the problem to an even bigger entity, let alone more of Europe's banks.

Expect the Unexpected

After a weekend of intense negotiations, USB reluctantly agreed to buy its main rival, Credit Suisse, for CHF3.0B, which is less than half of Credit Suisse's market cap on Friday. Credit Suisse shareholders will get one UBS share for every 22.48 Credit Suisse shares. The Swiss government has offered an additional CHF100B loan support for the merged companies. UBS sees the deal as earnings accretive by 2027.

Regulators and the respective banks stressed that it was a commercial buyout, not a bailout. UBS will have broad latitude in handling the assets it's acquiring and is expected to lay off around 9,000 employees as it shores up losses. The company could also spin off units of Credit Suisse to help recoup some of the transaction cost.

The Market Reaction

The deal is intended to reassure markets that a major global bank (bigger than Lehman Brothers) isn't about to collapse. But markets remain nervous, with shares in other major global banks declining in early trading on Monday, such as HSBC and Standard Chartered. HSBC reported a 93% bump in profits last year and just bought up the UK assets of SVB. Regulators insist that the banking situation in Europe is different than in the US, and there is no need to worry about contagion.

But that might not be all that much of a reassurance. While the collapse of three regional banks in the US did put pressure on Credit Suisse, the bank had been vulnerable for a long time after a string of losses and missteps for years. The catalyst for the crisis was the unexpected disclosure that there were accounting deficiencies in the annual report - something analysts can't predict. Several other major European banks have been struggling recently, including Commerzbank, Deutsche Bank, and Unicredit. Do any of them have accounting deficiencies that we don't know about? And now that UBS owns Credit Suisse, what other surprises will become apparent when it fully accounts for what's been happening at Credit Suisse? Although the deal might avert a full-blown crisis, investors are likely to be still concerned about the European banking sector for a while. 

Unicredit Italy in Wedge Pattern

From a technical perspective, Unicredito Italiano appears to be in a broadening wedge pattern after an impressive rally from €6 to €20. Wedges of this type typically correct between 50%-70% of their preceding leg, with a break of €10 shifting chances to a downward impulse instead. 

If the 50% Fibonacci at €13 holds firm, assuming the short-term decline continues, prices might accelerate, bringing the peak back into the spotlight. It might also prove to be a simple correction, in any case. However, a break below €13 might kick the door to fresh lows under €6 wide open.  

Source: Spreadex / UNICREDITO ITALIANO

Key Takeaways

UBS has agreed to buy Credit Suisse for CHF3.0B, with the Swiss government offering an additional CHF100B loan support. Markets are worried that further collapses could result from accounting deficiencies similar to those recorded at Credit Suisse, with major European banks under pressure. Italy's Unicredit price action shows the stock might be in a wedge pattern, with the 50% Fibonacci at €13 having implications for its short-term future.