UBS shares reverse losses, Credit Suisse craters 55% after takeover deal

UBS shares staged a remarkable rally Monday afternoon, reversing steep losses after the bank's 3 billion Swiss franc ($3.2 billion) "emergency rescue" of embattled domestic rival Credit Suisse.

Shares of UBS were around 2% higher at around 2:50 p.m. London time (10:50 a.m. ET), recovering from losses of over 14% at one point in the session. Credit Suisse, meanwhile, was last seen trading more than 55% lower.

Europe's banking index rose 1% around the same time, recouping earlier losses as a sense of calm appeared to return to markets.

The volatility comes shortly after UBS agreed to buy Credit Suisse as part of a cut-price deal in an effort to stem the risk of contagion to the global banking system.

Swiss authorities and regulators helped to facilitate the deal, announced Sunday, as Credit Suisse teetered on the brink.

The size of Credit Suisse was a concern for the banking system, as was its global footprint given its multiple international subsidiaries. The 167-year-old bank's balance sheet is around twice the size of Lehman Brothers' when it collapsed, at about 530 billion Swiss francs at the end of last year.

The combined bank will be a massive lender, with more than $5 trillion in total invested assets and "sustainable value opportunities," UBS said in a release late Sunday.

The bank's chairman, Colm Kelleher, said the acquisition was "attractive" for UBS shareholders but clarified that "as far as Credit Suisse is concerned, this is an emergency rescue."

"We have structured a transaction which will preserve the value left in the business while limiting our downside exposure," he added in a statement. "Acquiring Credit Suisse's capabilities in wealth, asset management and Swiss universal banking will augment UBS's strategy of growing its capital-light businesses."

Neil Shearing, group chief economist at Capital Economics, said a complete takeover of Credit Suisse may have been the best way to end doubts about its viability as a business, but the "devil will be in the details" of the UBS buyout agreement.

"One issue is that the reported price of $3,25bn (CHF0.5 per share) equates to ~4% of book value, and about 10% of Credit Suisse's market value at the start of the year," he highlighted in a note Monday.

"This suggests that a substantial part of Credit Suisse's $570bn assets may be either impaired or perceived as being at risk of becoming impaired. This could set in train renewed jitters about the health of banks."