How does UBS’s takeover of Credit Suisse stack up financially?

More than a month on, how does the ‘shotgun wedding’ between UBS and Credit Suisse look in light of both banks’ first quarter results? 

Credit Suisse continued to experience net asset outflows in the first quarter and reported pre-tax income of SFr12.8bn ($14.3bn). The result reflects the impact of the writing down to zero of SFr15bn of additional Tier 1 (AT1) capital notes, as ordered by the Swiss Financial Market Supervisory Authority (Finma) in light of the hastily brokered deal with UBS. 

The ailing Swiss bank also incurred a goodwill impairment charge of SFr1.3bn almost entirely in its wealth management business. At the group level, net asset outflows in the first quarter of 2023 were SFr61.2 bn, or 5% of assets under management, as of the end of the fourth quarter of 2022. 

Customer deposits declined by SFr67bn in the first quarter, with most of the outflows coming in the days immediately preceding and following the announcement of its merger with UBS. Deposit outflows have stabilised to much lower levels, but as of April 24 had not yet reversed.

UBS posted a net profit of $1.0bn for the first quarter of 2023, a more than 50% decline year on year. But it attracted $28bn of net new money in its global wealth management business in the same quarter, of which $7bn came in the last 10 days of March, following the announcement of its acquisition of Credit Suisse. It also saw $20bn in net new fee-generating assets in its global wealth management business.

So, has UBS managed to avoid, at least for now, any contagion effect from its forced acquisition of Credit Suisse? While the net new inflows is a clear sign of confidence in UBS and its expertise in wealth management, Vitaline Yeterian, senior vice-president, global financial institutions at ratings agency DBRS Morningstar, says some of Credit Suisse’s deposit outflows went to other competitors, which was expected given the noise. 

“It remains important for UBS to quickly close the deal to continue to maintain a good confidence level,” she says.

Despite Credit Suisse writing down the goodwill in its wealth management business, Pauline Lambert, executive director, financial institutions at Scope Ratings, says there are markets where Credit Suisse and UBS complement one another. 

“For example, in Asia, UBS is relatively stronger in north Asia, while Credit Suisse has strengths in south-east Asia. Credit Suisse also has an attractive business in Latin America,” she says. “With regard to the investment bank, UBS has made clear that it will stick to its focused approach as this has proven to be successful. However, parts of Credit Suisse’s investment bank will add further expertise and capabilities.”

More clarity on deal needed

But could UBS’s forced marriage with its ailing rival be classed as the deal of the century? According to the Financial Times, UBS is set to record the biggest-ever banking profit — an estimated $57bn — next quarter after it finalises its takeover of Credit Suisse. This is thanks to an accounting effect called “negative goodwill” — or badwill — which companies can book from buying undervalued businesses. 

UBS paid more than $3.2bn for its ‘shotgun wedding’ with Credit Suisse, although at SFr0.50 a share in its own stock, it was still much lower than what Credit Suisse’s shares were trading at (SFr1.86) on the Friday before the deal was brokered by the Swiss authorities.

Ms Lambert says the value of what UBS has acquired remains to be seen. “Pro forma financial information for the combined group is currently unavailable. UBS still needs more clarity on the value of the assets to decide what they would like to keep and dispose of. Assuming the acquisition is completed in the second quarter, UBS indicated that further details would be provided to investors next month.”

Dr Stefan Legge, an economist and head of tax and trade policy at the University of St Gallen, says there are still two opposing ideas concerning the deal from UBS’s point of view. 

“On the one hand, you could still argue that at $3.2bn Credit Suisse was a steal, especially after the $17bn wipeout of AT1 bonds. On the other hand, Credit Suisse had been a loss-making company for 10 years at the time of the acquisition and the bank’s earnings base has been eroding fast.”

Believers in the second view currently have the upper hand, it seems, says Mr Legge. “UBS’s share price was SFr20.30 at the beginning of March. Now it trades at SFr17.40. The company has a lot of work to do.” 

Ms Yeterian of DBRS Morningstar agrees, saying there are high execution risks given the significant size that the integration of Credit Suisse represents. “This could materialise as a drag on earnings, but we also recognise UBS has a comfortable capital cushion to execute on its planned acquisition of Credit Suisse,” she says.

Uphill battle to resolve legacy issues

Litigation against Credit Suisse is piling up, not just from investors challenging the writing down of its AT1 bonds following the deal with UBS, but also historical cases. 

Credit Suisse is currently defending itself against a $160m claim in London’s High Court over allegations it made ‘fraudulent misrepresentations’ relating to the sale of residential mortgage-backed securities during the 2007–09 global financial crisis. 

Mark Hastings, a partner at commercial disputes practice Quillon Law, says this case exemplifies the uphill battle UBS faces to resolve the legacy issues it will inherit in its controversial takeover of Credit Suisse.

“It will be interesting to see how the trial plays out, especially in the context of the public and political divisions in Switzerland over the bank’s collapse and cultural problems,” he says.

He says the outcome of this case may well set a precedent for UBS’s approach to handling the myriad Credit Suisse-related legal claims it is inheriting, and whether UBS will decide to simply settle other legacy claims behind closed doors in order to avoid further public scrutiny in Switzerland and internationally.

“Litigation could materialise as a drag on earnings,” says Ms Yeterian. “At the same time, we note UBS is benefiting from extraordinary government measures such as SFr9bn protection from the Swiss authorities in case of losses going beyond the first SFr5bn, which is to be assumed by UBS.” 

In terms of funding and liquidity, Ms Yeterian says the Swiss National Bank is granting Credit Suisse very significant access to a long-term secured liquidity facility, which protects UBS from market uncertainty and supports the execution of the integration of Credit Suisse into UBS.

Ms Lambert at Scope Ratings says litigation costs are always very difficult to get a handle on. “Investigations relating to Greensill Capital and Archegos are still at an early stage. At this point, the potential costs are unknown.” 

In 2021, Credit Suisse was hit with losses relating to the collapse of hedge fund Archegos Capital Management, which resulted in a net charge of $5.2bn, and its supply chain finance funds were also impacted by the collapse of UK-based Greensill Capital. 

Analysts are still awaiting UBS’s financial plan and strategy regarding the integration of Credit Suisse, which Ms Yeterian says should provide more information on the outlook for profit and loss items, including the revenues of the combined entity. “UBS guided that these disclosures would be provided as part of their quarterly earnings post-closing, which would be the second quarter of 2023 earnings if the closing occurs in May 2023,” she says.

Too big to bail

Mr Legge says the most difficult question is whether Credit Suisse’s Swiss-based operations will remain as a separate entity or be entirely taken over by UBS, which would mean job losses and the closure of a number of branches. 

“If they keep the Swiss bank, it is hard to see how it will be very successful,” he says. “The only option that would make this possible is the Denner option.” 

Denner is a discount supermarket chain in Switzerland. Swiss retail company Migros bought Denner but its business continues under the Denner brand. “This is what UBS might consider with the Swiss Credit Suisse business,” says Mr Legge.

But he says it will be difficult for UBS to come up with a solid strategy in a short period of time. “From an investors’ and policy-makers’ perspective, they [UBS] have one shot to get it right. There’s a lot of potential for screwing this up, even at a bargain price.”

Mr Legge says the new UBS will be not too big to fail, but ‘too big to bail’. “Consider the amount of money necessary to save Credit Suisse. How much bigger will those numbers be for UBS?”

He says there is public pressure in Switzerland now to ensure something like this does not happen again. “Banking should be very simple, boring and stable. But how do you nurture these values? These people [bankers] make an awful lot of money, but there’s a public expectation to deliver not only profit, but value creation.”