Big U.S. Banks Might Also Benefit From Forced Credit Suisse Merger, Analysts Say.

In a recent report, analysts said they believe UBS' acquisition of Credit Suisse could make the Swiss bank quite wealthy. Besides the Swiss bank, analysts believe the acquisition could benefit some U.S. banks as well.

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A forced deal announced Sunday by UBS will see the bank buy Credit Suisse for around $3.2 billion, which will amount to 3 billion Swiss francs or around 3 billion Swiss francs. It is estimated that the Swiss National Bank has committed to lending up to 100 billion Swiss francs, or $108 billion, to support the takeover, whereas the Swiss government has also promised it will assume 9 billion Swiss francs in losses from certain assets within a set timeframe so as to reduce the risk to UBS from such activities.

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It's been quiet on Wall Street this week as it tries to figure out how the union of two world-class financial institutions will affect the performance of an industry that's already on an unsteady footing after the closure of Silicon Valley Bank and Signature Bank.

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Analysts at Bank of America believe the deal could be good for UBS shareholders over the long term, according to Bank of America analyst Alastair Ryan. Ryan upgraded UBS' U.S.-listed shares to a buy from neutral, citing the possibility of cost synergies between the two Swiss banks whose headquarters are in Switzerland.

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As a result of Ryan's price target increase, he expects the stock to rally 36.3%, which implies a rally to $24.81.

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The logic involved in the industry is clear: CS is CS's closest competitor to UBS in Switzerland and wealth management; as a result, both banks are heavy users of Swiss central costs," he wrote to clients in a note last week.

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While Jefferies analyst Flora Bocahut stated that the deal itself could be beneficial for shareholders on paper, it is up to UBS to actually execute the deal. As part of the deal, shareholders of Credit Suisse will receive 1 UBS share for every 22.48 shares they own. It is nonetheless her belief that the deal was positive, given that alternatives included nationalizing or unwinding Credit Suisse, which both would have increased the risks for the broader financial sector.

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“Our intention with this transaction is to solve CS’ problem and to reduce system risks, while at the same time ensuring UBS shareholders also benefit over time from this deal,” she said in a note sent to clients. In spite of this, UBS has significant execution and litigation risks, the buyback is temporarily suspended (it is unclear how long this will remain suspended), it is likely that UBS' capital requirements will be raised, and management’s attention will be occupied for many quarters, maybe even years as a result of this deal.”

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Others, however, are unsure as to whether the broader industry will survive the downturn - and their outlooks are varied.

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A note to Goldman Sachs' clients published on Sunday moved Lotfi Karoui from the overweight rating to the neutral rating based on the deal he had predicted.

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As Karoui explained on Friday, “we suggested switching to a neutral allocation on banks in the EUR market (from an overweight allocation previously) in the broader European banking sector until clearer guidance is provided on Credit Suisse's future path. As a result, the performance of the broader European banking sector will remain under pressure. This outcome today provides a great deal of clarity.”

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In the meantime, Goldman Sachs' chief European economist, Sven Jari Stehn, says that since the banking crisis started, the firm expects the European Central Bank to increase interest rates by 25 basis points in May, as opposed to a 50 basis point hike planned before the financial sector crises started. Even though Stehn told us to not expect another rate hike in May, he still expects the Bank of England to raise its rate by 25 basis points at its next meeting.

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Barclays analyst Amit Goel, however, did not seem to think so. On Monday, he lowered his opinion on European banks from positive to neutral. Aside from Switzerland, Goel has preferred global equities including BNP Paribas, ABN AMRO Bank, HSBC, and Lloyds Bank as preferable equities to banks in the United Kingdom, Ireland, France, and the Netherlands.

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Goel stated that recent events once again demonstrate the fragility of the banking system, despite the fact that regulation has increased severalfold since the Global Financial Crisis began. Considering the recent events, it is expected that the cost of equity in the broader sector will remain high for some time, with liquidity requirements likely to need to be revisited as well.

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Specifically, investors around the world are watching regional banks in order to determine the risk of contagion within the industry, especially in the U.S. First Republic Bank is one of these regional banks.

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The stock price of First Republic fell by more than 70% last week despite the fact that a group of banks said they would assist it by depositing $30 billion.

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As a result of the deposit flight of deposits out of regional banks, Ebrahim Poonawala, a Bank of America analyst, said that if investors gain confidence that this flight has been contained, stock prices could stabilize. Moreover, Poonawala stated that investors will be watching this week's Federal Reserve policy meeting to see if the central bank will go through with the expected 25 basis point interest rate increase.

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As the UBS takeover of Credit Suisse approaches, Wells Fargo's Mike Mayo sees an opportunity for U.S. banks in the wake of the deal. Mayo describes the deal as proof that "Goliath is winning," noting that it would not close until the end of the year, he said that US banks may have an opening.

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The merger, according to Mayo, confirms that the largest U.S. capital players remain capable of gaining market share around the world, just as they have for the past decade.