‘Deal of the century’ — How UBS’s rescue of Credit Suisse proved a boon

UBS’s top managers were sceptical when they were forced to rescue their scandal-ridden rival Credit Suisse. Five months on, the deal has made the bank Europe’s second most valuable lender.

On Thursday UBS said the state-sponsored takeover had fuelled a $29bn gain, a record quarterly profit for any bank. Chief executive Sergio Ermotti also confirmed that UBS would get to keep its rival’s “crown jewel” — the domestic consumer bank — while also cherry picking the most attractive assets, clients and staff from the investment bank and wealth management divisions.

The stock rose to its highest level since the 2008 financial crisis, extending a 31 per cent surge this year. This means that UBS’s market value has vaulted over that of BNP Paribas — ranking the bank second in Europe after HSBC — and has trumped that of US lender Citigroup.

“The Credit Suisse acquisition will act as an accelerant to our plans,” Ermotti told analysts.

Since the merger was sealed over a frantic weekend in March, UBS chair Colm Kelleher and Ermotti have overcome political concerns over its dominant market position — the combined bank’s $1.7tn assets eclipse Swiss GDP — notably by exiting taxpayer-funded government support facilities early.

Now the pair faces the tricky task of integrating the businesses and matching expectations for what looks like one of the biggest steals in financial history.

“Integrating key staff, retaining clients and migrating them to its own systems, solving Credit Suisse’s litigation issues . . . will require significant time and management attention,” said Andreas Venditti, an analyst at Vontobel.

The UBS building in Manhattan. UBS has ambitious plans to grow its market share in Asia and the US
The UBS building in Manhattan. UBS has ambitious plans to grow its market share in Asia and the US, where it trails Morgan Stanley, the world’s largest wealth manager © Eduardo Munoz Alvarez/VIEWpress/Corbis via Getty Images

While removing state guarantees has damped political objections, UBS’ record gain prompted angry reactions in Switzerland, which is holding general elections in October.

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“UBS’s figures are nothing but shocking,” said Cédric Wermuth, co-president of Switzerland’s second-largest political bloc, the Social Democratic Party. The takeover was the “deal of the century” he said, and had come at the expense of the Swiss people.

The $29bn accounting gain on the Credit Suisse takeover — known as negative goodwill, or badwill — largely reflects the fact that the price paid for Credit Suisse — $3.4bn — amounted to only 6 per cent of its tangible book value.

UBS also announced that the integration of Credit Suisse’s domestic retail unit would result in 3,000 redundancies in Switzerland in the coming years. Deeper job cuts from the group’s more than 100,000 combined workforce are expected to follow, but executives are being tight-lipped about their plans to avoid more controversy.

“It must not be that in the end, it is the counter clerks who pay for the irresponsible behaviour of their bosses,” Wermuth said. 

Absorbing Credit Suisse is now expected to take up to three years — shorter than the four years initially signalled by UBS. Some analysts feared that when the deal was agreed it would derail UBS’s longer-term ambitions of growing its business in Asia-Pacific and the US, where it trails Morgan Stanley, the world’s largest wealth manager, in market share.

UBS chairman Colm Kelleher
UBS chair Colm Kelleher is trying to close the valuation gap on the likes of JPMorgan © Fabrice Coffrini/AFP via Getty Images

Yet in some areas, the deal will end up helping UBS grow its global footprint, not least in asset management and investment banking, where the executives have begun sifting through Credit Suisse’s business lines to identify which will be prioritised and which pruned.

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UBS said on Thursday that it was retaining $9bn of risk-weighted assets from its defunct rival’s investment bank, with the remaining $17bn consigned to its new “bad bank” unit, known as Non-core and Legacy.

Ermotti said: “We will strengthen our position as the only truly global wealth manager and as the leading Swiss universal bank, with scaled-up asset management and a focused investment bank.”

UBS was investing in its wealth management arm and offering incentives to advisers in a drive to win back the more than $200bn of assets that Credit Suisse clients pulled from the bank in its final year, he added.

“[It] won’t be easy, but recapturing as much as we can is one of our top priorities,” he said.

UBS said money had already begun to return, with $8bn of wealth management net new assets in July and August across the group.

The trend has helped shareholders to grow more optimistic about the takeover, even if some remain sceptical.

“Despite progress in clarifying many aspects of the planned run down and integration, execution risk in the transaction will remain high given its breadth and complexity,” said Alessandro Roccati, an analyst at Moody’s Investors Service.

The UK headquarters of Credit Suisse Group:
The UK headquarters of Credit Suisse Group: UBS is investing in its wealth management arm and offering incentives to win back funds pulled from Credit Suisse in its final year © Jason Alden/Bloomberg

Ermotti and Todd Tuckner, the recently installed UBS chief financial officer, are betting on a further boost in the coming months when they can provide more details about when the bank will revive a share buyback programme paused because of the takeover.

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Citi analyst Andrew Coombs said UBS’s better than expected common equity tier 1 ratio of 14.4 per cent, a key measure of the lender’s loss-absorbing capital strength, was good news for shareholder returns.

“This seems to suggest buybacks could start much earlier than originally anticipated, in addition to the stated plans to grow the dividend,” he said. Stock repurchases could restart in the first half of next year, he added.

UBS chair Kelleher had spent much of last year working with Ralph Hamers, Ermotti’s predecessor, trying to convince large US active fund managers to become big shareholders in the group, as they attempted to attract the same calibre of investor as Wall Street peers.

UBS’s chair is trying to close the valuation gap on the likes of JPMorgan — the highest-valued US lender — and Morgan Stanley, where Kelleher spent most of his career.

But doing so will be an uphill task. UBS’s price to tangible book value — a metric of the premium placed on the group by investors — of 1 is just under half that of Morgan Stanley.

Prospective shareholders will not only need to see evidence that the Credit Suisse deal will boost its performance and market position, but also that UBS avoids the cultural and operational pitfalls of orchestrating a complex merger.

“The numbers are still incredibly messy,” said Jérôme Legras, a managing partner and head of research at Axiom Alternative Investments. “For now it’s too hard to read through all the moving parts.”

Additional reporting by Sam Jones in Zurich

Source: https://www.ft.com/content/ca733a5c-0580-4886-b983-1caf9976a579