Explainer: UBS has Swiss mountain to climb with Credit Suisse

Credit Suisse AG

12/06/2023 07:26

By Tomasz Janowski, Oliver Hirt and John Revill
       ZURICH, June 12 (Reuters) - With its Credit Suisse
takeover officially wrapped up, UBS must now make good on its
promise that the government-orchestrated rescue will deliver
both for shareholders and Swiss taxpayers.
    The world's biggest banking deal since the 2008 financial
crisis has forged a wealth manager with an unrivalled global
reach and $5 trillion in assets under management, handing UBS an
overnight lead it would otherwise have taken years to achieve in
key markets.
    Arranged over a weekend in March to stave off a broader
banking crisis, and backed by up to 250 billion Swiss francs
($281 billion) in public funds - the tie-up now poses huge
challenges and potential rewards for Switzerland and its biggest
bank. 
    Switzerland must now contend with a bank whose balance sheet
is twice as big as its economy, while Sergio Ermotti, who was
brought back in as CEO to oversee the mega merger, faces tough
strategic decisions as UBS integrates its smaller rival against
an uncertain economic backdrop. 
    
    THE SWISS BANK
    Possibly the first hurdle is a politically fraught decision
on Credit Suisse's "crown jewel", its domestic business.
    Bringing this into UBS and combining largely overlapping
networks could produce significant savings and Ermotti has
suggested doing so was the base scenario for the integration. 
    But UBS will have to weigh that against public pressure to
keep the Credit Suisse business separate with its own brand,
identity and, critically, workforce. The unit had almost 7,300
staff at the end of 2022 and a 1.43 billion Swiss franc
operating profit while the entire group suffered heavy losses.
    A combined business would have a dominant position in the
Swiss loan market, while public unease over a Swiss mega-bank,
could lead to even tougher regulation and capital requirements.
    UBS has said all options, which could include an initial
public offering, are open, with a decision due within months. 
    
    BLEEDING STAFF, CLIENTS?
    UBS has stressed its intention to move quickly to prevent
staff and customer departures, with Chairman Colm Kelleher
recently signalling net gains in business in some areas. 
    However, insiders talk of rivals aggressively wooing Credit
Suisse clients and employees. One said about 200 people were
leaving the bank each week. 
    Investors, finance experts and analysts say keeping, and
growing, business while improving staff morale might be the
biggest challenge of all.
    Clients who would typically bank both with UBS and Credit
Suisse to spread their risk, might now take some of that
business elsewhere. 
    "One plus one will not equal two. A sizeable portion of the
assets will be lost and that will have an impact on the
profitability for UBS of the deal," said Alan Mudie, chief
investment officer at Woodman Asset Management.
    Moreover, such a complex operation risks the bank turning
inwards, at the expense of innovation and customer service.
    "My client relationship manager is going to be more worried
about keeping their job than servicing my needs," said Arturo
Bris, Professor of Finance at the International Institute for
Management Development (IMD) in Lausanne.
 
    
        
  
    'CULTURAL FILTER'
    UBS, which has said it aims to finish the two banks'
integration in three to four years, also made clear its combined
workforce - now at around 120,000 - will need to shrink. 
    UBS Chairman Kelleher has openly spoken about fears of
"cultural contamination" and applying a "cultural filter" to
staff from Credit Suisse's investment bank, citing inadequate
risk controls and unchecked growth and capital spending.
    All that contributes to uncertainty, which could make it
harder for the combined group to keep top performers and recruit
new staff, some observers warn.
    "An overhaul creates nervousness among all employees, also
among the top performers," said Lars Schweizer, professor of
finance at Frankfurt University, adding they often get
approached by headhunters with offers from competitors.
    
    SKELETONS? 
    While UBS has already provided a financial snapshot of the 
combined group and earmarked tens of billions of dollars for
cost and possible losses arising from the tie-up, it has also
warned the numbers could change materially over time. 
    UBS said it had found no skeletons in Credit Suisse's books,
but only now will it gain full insight into a bank which has
suffered from years of scandals, loose oversight and in March an
admission of material weaknesses in its controls. 
    One potential risk stems from legal challenges to the
decision by Swiss authorities to write off special AT1 bonds
issued by Credit Suisse. While UBS is not a party to these legal
actions, it could add to its funding costs.
    
   INVESTMENT BANK HEADACHE
   UBS executives said they aim to radically shrink Credit
Suisse's investment bank. Yet there are questions over how far
and how quickly UBS will run down the business and at what cost.
    The Swiss government is providing a guarantee of up to 9
billion Swiss francs for potential losses related to Credit
Suisse's investment bank on top of up to 5 billion francs in
losses UBS has agreed to assume. 
 
    'POISONED CHALICE' 
    Ermotti promised his team would "work very hard" to avoid
any consequences for taxpayers and analysts say that with Swiss
federal elections due in October, UBS needs to tread carefully.
    On paper, UBS does not seem to need any public funds, with a
nearly $35 billion financial cushion from buying Credit Suisse
at a fraction of its book value.
    Still, talks on the backstop held since the deal was
announced on March 19, suggest UBS was keen to secure what
Barclays called a "poisoned chalice" because of potential for
political backlash.
    While Ermotti has played down concerns UBS will get too big,
Switzerland's second-largest political party has proposed
drastically shrinking its assets, saying the lender's scale and
an implicit state guarantee raised the risk of another expensive
rescue. 

($1 = 0.8889 Swiss francs)

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Potential split for combined private banking business    https://tmsnrt.rs/3N6tw5W
Potential split for combined private banking business    https://tmsnrt.rs/3WKSvPl
UBS vs Credit Suisse - business mix    https://tmsnrt.rs/3qcWAzE
UBS vs Credit Suisse - business mix    https://tmsnrt.rs/42gnW5w
UBS vs Credit Suisse - total assets    https://tmsnrt.rs/3ON9QoS
UBS vs Credit Suisse - total assets    https://tmsnrt.rs/3WJ4GfA
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 (Reporting by John Revill and Oliver Hirt; Additional reporting
by Noele Illien; 
Writing by Tomasz Janowski
Editing by Elisa Martinuzzi and Alexander Smith)
 ((tomasz.janowski@thomsonreuters.com; +1 332 219 1466;))