UBS and Credit Suisse shares drop as Swiss prosecutor investigates takeover

By Joice Alves

LONDON (Reuters) - Credit Suisse and UBS shares fell on Monday after Switzerland's federal prosecutor opened an investigation into the emergency merger of the two lenders.

The office of the attorney general said on Sunday that the prosecutor opened an investigation into the state-backed takeover of Credit Suisse by UBS Group last month, looking into potential breaches of the country's criminal law by government officials, regulators and executives at the two banks.

UBS and Credit Suisse were each set for their biggest daily decline in 10 days, falling around 4% in early trading before paring losses to stay down 2% and 1.8%, respectively at 1410 GMT. They underperformed the European banking index, which was up 1.2% on the day.

The banks declined to comment on the investigation.

The UBS takeover of rival Credit Suisse was engineered by Swiss authorities in a bid to rein in turmoil in global banking.

But the Swiss public and politicians have voiced concerns about the level of state support offered in the deal, with nearly 260 billion Swiss francs in liquidity and guarantees offered by the government and Swiss National Bank (SNB).

"The government underestimated how much antipathy the public in Switzerland have against the deal," said Michael Field, Europe Market Strategist at Morningstar.

"Comments in the media this morning about 30% of workforce being cut don’t help either," he added.

Swiss daily Tages-Anzeiger reported on Sunday, citing an unnamed senior UBS manager that the bank created by takeover of Credit Suisse is poised to reduce its workforce by 20-30%. The two banks combined have 120,000 staff worldwide and $1.6 trillion in assets.

Separately, data showed on Monday that sight deposits held by the SNB declined last week, suggesting that Credit Suisse and UBS may have cut back on use of emergency funds offered them.

The SNB, Credit Suisse and UBS declined to comment on the changes in sight deposits.

(Reporting by Joice Alves, Editing by Louise Heavens and Deepa Babington)