Banking and FinanceIssue 03 - 2023MAGAZINE
GBO_ UBS-Credit Suisse merger

UBS-Credit Suisse merger: What’s next?

According to sources, several fund managers who own UBS stock believe the company paid a fair price to acquire Credit Suisse

According to a body that examines disputes in the credit default swaps (CDS) market, UBS is the sole entity to succeed the Credit Suisse Group after the two banks merged.

The result is that Credit Suisse will no longer serve as the reference entity for its outstanding CDS, a form of insurance against holding hazardous debt. Instead, UBS will take over as the new reference entity.

An investor noted that there should be no significant market effects since the outcome was generally anticipated. The CDS contracts would not be activated, and UBS would not be responsible unless a new credit event occurred.

It was anticipated that the emergency takeover of Credit Suisse by UBS may result in the loss of thousands of jobs, the departure of important personnel, and a difficult integration task. Still, for many UBS investors, it is a good deal for Switzerland’s largest bank. According to a report, Swiss banking giant UBS plans to fire 35,000 workers, or over 50% of the Credit Suisse staff, as part of the emergency rescue takeover of its rival in March 2023.

The two banks reportedly had a combined workforce of almost 120,000 employees after UBS acquired Credit Suisse in an emergency deal, with 37,000 working in Switzerland. Most of Credit Suisse’s private bankers will stay at UBS.

Since UBS finalized the 3 billion Swiss Francs ($3.4 billion) acquisition of Credit Suisse in June, investors have begun to share the optimism of UBS Chairman Colm Kelleher, who has emphasized the many prospects and potential difficulties coming from the transaction.

According to sources, several fund managers who own UBS stock believe the company paid a fair price to acquire Credit Suisse; some even called the deal a steal.

During an interaction with Reuters, Guy de Blonay of Jupiter Asset Management said, “UBS is being fairly modest about the full extent of the benefits it can receive from this politically sensitive transaction.”

As Switzerland’s second-largest bank teetered on the brink of failure, UBS agreed to acquire Credit Suisse in a rescue operation organized by Swiss authorities, becoming a joint firm in charge of over $5 trillion in assets.

UBS said merging the two companies might take three to four years. During that time, the bank intends to run two parent companies, UBS AG and Credit Suisse AG, each with its subsidiaries and offices.

In the end, the agreement should allow UBS to get the competitive advantage it needs to expand its size and reach in critical regions.

Another investor said, “UBS got Credit Suisse for basically nothing, so the deal will pay out for them.”

Official guarantee

In a regulatory filing in May, UBS highlighted tens of billions of dollars in potential costs and benefits from the takeover.

It stated that it anticipated fair value adjustments to the merged group’s financial assets and liabilities to have a negative impact of $13 billion and an additional $4 billion in potential litigation and regulatory costs resulting from outflows.

However, a 16 billion franc gain from the write-down of Credit Suisse’s AT1 bonds and $34.8 billion from purchasing Credit Suisse at a fraction of its book value would more than outweigh these factors.

Additionally, it acquired a public guarantee to cover losses of up to 9 billion francs. As a result, UBS now has a significant risk buffer to enable it to digest its nearby rival.

Deka Investments’ Andreas Thomae claimed that in a typical transaction “they wouldn’t have had this buffer.”

Fund managers also questioned whether competition watchdogs would have authorized the merger, which would have given the combined bank a market share of more than a quarter of Swiss domestic loans (26%) and domestic deposits (26%) in normal conditions.

Thomae continued, “The authorities have approved the arrangement because they needed to locate someone immediately. It’s a good bargain for UBS if everything goes according to plan.”

However, Thomae pointed out that UBS inherited a problematic legacy from Credit Suisse, citing legal concerns that UBS has stated might cost the company billions of euros.

According to different management styles, the biggest danger for UBS is the departure of many of Credit Suisse’s top millionaire and billionaire client advisers.

He said that competitors have stolen entire teams from Credit Suisse and that some clients will likely do the same.

In the worst-case scenario, up to half of the assets Credit Suisse managed before significant withdrawals started in October might eventually go to rival wealth managers.

The fund manager anticipates a challenging next two years for UBS but is also more optimistic about the future. However, he added, “Over a three to five-year period, the transaction definitely does pay off.”

Even more assured was Cash Cow Jupiter fund manager de Blonay. He told Reuters that in the long run, profitability should improve, assisting the company to achieve a much higher valuation.

“UBS is in an excellent position to restructure rapidly, control outflows, and decrease risks,” he said.

Since the deal’s initial announcement, UBS shares have increased 5.1%, significantly trailing the STOXX Europe 600 Financial Services Index (.SXFP).

De Blonay asserted that the share price movements likely represented market hesitancy surrounding the takeover, but he anticipated a positive change “after the dust settles” in the share price.

JP Morgan analysts anticipate a significant increase in UBS stock as the acquisition benefits become clear. By the 2024 end, the bank wants the price to increase from 18.22 Swiss francs to 27 francs.

According to analyst Kian Abouhossein, UBS is a wealth management powerhouse with the potential to bring in 150 billion dollars in new client money annually.

The total assets under administration at Julius Baer, which has supplanted Credit Suisse as Switzerland’s second-largest wealth manager, would be the equivalent of that volume every three years.

One insider anticipates it will be absorbed into UBS, even though the Swiss public and politicians favour a spin-off to promote choice and competition.

Investors applauded the decision for the company, which was Credit Suisse’s top performer in 2017, with a pretax profit of 1.4 billion Swiss francs.

UBS and Credit Suisse together would have a market share in Switzerland that is just inside allowable bounds, according to Deka’s Thomae.

He declared, “From UBS’s perspective, the business is a tremendous asset, a good cash cow.”

Shrouded in secrecy

A document from a parliamentary committee revealed the investigation into Credit Suisse’s collapse would keep its files sealed for 50 years, much longer than the customary 30 years. Swiss historians are concerned about the degree of secrecy.

According to reports, potential penalties for violating confidentiality (the requirement to keep the files secret for 50 years) ranged from a ban on speaking before the committee to a prohibition on speaking for six months to three years in prison and fines.

While there may be concerns over the loss of jobs and integration challenges resulting from the emergency takeover, investors in UBS have expressed optimism over the potential benefits of the acquisition. The deal is a good bargain for UBS, with fund managers praising the company’s ability to restructure rapidly and control outflows.

The future of Credit Suisse’s Swiss operation remains uncertain, but UBS is expected to absorb the company, which was its top performer in 2017.

Overall, UBS shareholders hope the acquisition will pay off in the long run, with JP Morgan analysts predicting a significant increase in the company’s stock price.

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