By Pamela Barbaglia, John O’Donnell and Brenna Hughes Neghaiwi

ZURICH (Reuters) – Credit Suisse’s top management are under pressure to come up with an overhaul plan for the scandal-hit Swiss bank that could include a potential merger with rival UBS, three people familiar with its thinking told Reuters.

The bank’s executives fear the flagship Swiss lender, left vulnerable by scandals, could be challenged by investors demanding its break-up, or that its shrinking stock-market value makes it a target for a foreign hostile takeover, those people said.

New chairman, Antonio Horta-Osorio, announced a strategic review in late April, telling investors he would take time in reaching hard decisions that lay ahead.

The bank’s senior management are due to meet next week, one source said, while another person with knowledge of the matter said top executives wanted to examine restructuring proposals in early July.

The Swiss bank has had to review its business after losing more than $5 billion in the rush to unwind trades by family office Archegos. It faces a barrage of legal action for helping clients invest $10 billion in bonds issued by collapsed supply chain finance firm Greensill Capital.

The bank’s shares have dropped by more than a quarter since early March, when its problems with Greensill were exposed.

“Credit Suisse needs a merger deal right away,” a person with knowledge of the bank’s thinking told Reuters.

“There is growing concern in Zurich that activist investors will go after them if they stand still.”

Some executives have debated steps such as spinning off its local Swiss bank to prepare the rest of the business for a merger, pruning back investment banking or selling its asset management business, two of the people said.

A third said selling the U.S. investment bank was also an option.

Management discussions on any restructuring are preliminary and while they are in full swing, no decisions have yet been taken, the people said.

Credit Suisse and UBS declined to comment.

The bank’s management needs a new-look Credit Suisse, as its standing with customers and in Switzerland hits a low ebb.

In April, Swiss supervisor FINMA said it had opened enforcement proceedings against Credit Suisse following Archegos and that it would investigate risk management shortcomings.

Swiss regulators are exasperated with what they see as the bank’s freewheeling culture, said one person with direct knowledge of the matter.

Credit Suisse’s shrunken market valuation makes it worth a fraction of some of the big Wall Street banks, which have also been touted as potential suitors.

But any U.S. takeover would not be well received in Switzerland. Relations between Swiss banks and Washington were damaged when the United States pressured them into giving up their strict secrecy code more than a decade ago.

‘DISAPPEAR IN FOREIGN HANDS’

A merger with UBS would more palatable, the people said.

“The Swiss establishment is aware that without a domestic merger Credit Suisse will disappear in foreign hands,” one of the sources said.

But the combination of Credit Suisse-UBS would have a dominant position in the Swiss market, a concern for regulators who could also demand that a combined group bolster its capital.

Credit Suisse could split out its Swiss bank to address competition concerns, one source said.

Credit Suisse-UBS would have workforce of more than 110,000 and a market value of more than $85 billion.

Earlier this year, when asked about a tie-up with Credit Suisse, UBS CEO Ralph Hamers threw cold water on the idea, saying he preferred “organic” growth.

Any M&A deal for Credit Suisse would mark the end of a national icon, founded to finance the country’s pan-Alpine railways and central to Switzerland’s transformation from a farming nation to financial powerhouse.

In early trading on Friday, Credit Suisse shares were up 2.8% while UBS shares were down 0.2%. Credit Suisse also got a boost after the Federal Reserve stress tests found capital levels at its U.S. arm would withstand a severe economic downturn.

For such a flagship, the Swiss may prefer a home-grown solution to the prospect of a takeover by a foreign bank.

A cross-border merger would be complicated because it would be unclear whether Switzerland or another host country would have control.

UBS, for instance, held merger talks with Germany’s Deutsche Bank in 2019 but they fell apart in the face of Swiss opposition, said another person familiar with the matter. The two banks declined comment on this.

Deutsche CEO Christian Sewing has expressed interest in participating in European bank mergers.

But many people who spoke to Reuters for this story, however, believed a deal between Deutsche Bank and Credit Suisse was unlikely.

(Reporting by Pamela Barbaglia in London, John O’Donnell in Frankfurt, Brenna Hughes Neghaiwi in Zurich; additional reporting by Oliver Hirt in Zurich, Patricia Uhlig and Tom Sims in Frankfurt, Lauren LaCapra in New York; writing by John O’Donnell; editing by Rachel Armstrong and Jane Merriman)