Two days after UBS agreed to spend $3.25bn to rescue its rival Credit Suisse, executives have started trying to move past the risks and sell investors on the benefits of the shotgun marriage.
Chief executive Ralph Hamers told the Financial Times that the deal was “not simply about bringing two companies together” but about “how we can build a bigger UBS”.
The rescue, which will create the world’s fourth-largest bank by assets — with 120,000 staff and $5tn in assets — has raised concerns that it might be an unwelcome distraction for UBS executives.
Those executives, however, have stressed they were not forced into the deal and that it will boost the bank’s earnings per share by 2027 at the latest. They have pointed to the low price they paid for a business that had a market capitalisation of $7.5bn last week, and to the SFr100bn of liquidity the Swiss government has committed as a backstop.
Wealth management
With $3.4tn of wealth management assets, UBS would become the second-largest private bank in the world, just behind Morgan Stanley — or an “asset-gathering juggernaut”, as Citigroup analyst Andrew Coombs wrote.
The combined wealth business will be the biggest player in South-East Asia as well as the Middle East, and one of the leading managers in Latin America, helped by Credit Suisse’s Brazilian division.
The deal will have little benefit, however, for UBS’s ambition to grow in the US, since Credit Suisse exited the market in 2015.
The combined business could lose some customers, analysts also note, who are clients of both lenders and would want to diversify their banking relationships.
In recent months, UBS has also been a refuge for fleeing Credit Suisse clients. Hamers said the bank received a surge of inflows last week, as nervy customers pulled their savings from Credit Suisse and other fragile banks.
“The inflows that we saw during . . . last week, they really demonstrate our status as a safe haven,” Hamers told analysts.
But UBS will no longer be seen as an alternative to Credit Suisse, so wealthy clients could be tempted to look elsewhere. Fellow Swiss wealth manager Julius Baer, which has a strong business in Asia, is expected to be a beneficiary: its shares have jumped 13 per cent this week.
JPMorgan analysts predict that the combined business would be most susceptible to withdrawals from ultra-rich clients — who make up 55 per cent of the wealth assets at both banks — as well as overlapping clients in Asia and Switzerland.
The Swiss bank
Credit Suisse’s most valuable asset was its domestic bank. Known internally as the ‘jewel in the crown’, analysts had estimated the business could fetch up to SFr15bn in a spin-off. In 2017 plans had been drawn up to list 25 per cent of the business, which is ringfenced from the rest of the group.
Analysts expected its spin-off to be one condition of a UBS-Credit Suisse combination, given that the two lenders control around 30 per cent of the Swiss market. But so far, UBS has shown little appetite for shedding Credit Suisse’s domestic bank, finding its corporate banking particularly enticing.
One person involved in negotiating the rescue said he did not anticipate any antitrust problems in Switzerland.
“The government just pushed through emergency legislation to block shareholders from voting for this deal — do you really think they will care about anti-competition rules?” the person said.
Should UBS hang on to the domestic business, many of the 17,000 jobs at Credit Suisse in Switzerland will be threatened once UBS closes branches and removes duplicate administrative roles.
Asset management
Combining UBS’s $1.1tn asset management business with Credit Suisse’s $400bn unit would create Europe’s third-biggest asset manager.
The two businesses complement one another, with UBS Asset Management more focused on active strategies designed for its wealthy clients, while the Credit Suisse business has a higher proportion of passive products and alternative funds.
Yet while a stronger investment arm helps UBS’s core business of looking after rich clients’ wealth, bringing the two businesses together brings risks.
Credit Suisse’s investment arm was the source of one of its biggest scandals in recent years, when it was forced to close $10bn of investment funds tied to specialist finance firm Greensill Capital in 2021.
The collapse led to legal battles and tortuous insurance claims, as Credit Suisse tried to recoup its clients’ losses, which are expected to continue for years to come.
Investment bank
By far the most precarious of the Credit Suisse divisions is its investment bank, which was already being scaled back before the UBS deal.
For senior managers at UBS, it is the part of the business they see as the worst fit with their current strategy. It is also the unit from where most of Credit Suisse’s scandals and losses have emanated in recent years.
UBS intends to wind down most of the investment bank and the government is offering to contribute SFr9bn to protect it against losses from doing so — once UBS has borne the first SFr5bn itself.
The wind-down will take place in Credit Suisse’s non-core unit, or “bad bank”, set up last year to offload unwanted assets.
Anything the UBS management deems to be too risky and of little use to its wealth management business — including leverage finance and structured credit — will be wound down.
Under the terms of the takeover, the combined investment bank will account for no more than a quarter of the group’s risk-weighted assets.
Many of Credit Suisse’s 17,000 investment bankers could lose their jobs, according to people familiar with UBS management’s thinking. However, UBS may also look to sell certain parts of the business rather than wind them down.
While the UBS leadership has little time for Credit Suisse’s sales and trading operations, its advisory arm does garner some interest, according to people involved in the planning.
UBS managers believe advantages come with retaining bankers who specialise in growth areas such as pharmaceuticals, technology, media and telecoms, because the owners of the businesses could be persuaded to become wealth management clients.
All this casts doubt over Credit Suisse’s plan to spin off much of the investment bank under the CS First Boston brand and for it to be run by former board member Michael Klein. The FT reported on Tuesday that UBS was set to enter talks with Klein to unwind the deal.