On paper, UBS did a good deal when it acquired Credit Suisse for just 3 billion Swiss francs. However, the actual price will only be known once the merger is complete, which is taking place amid a minefield of legal, regulatory and market risks.
This content was published on April 03, 2023
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swissinfo.ch
UBS Chairman Colm Kelleher recently summed up his bank’s situation in the light of the CS acquisition: “I cannot stress enough how massive this deal is in terms of financial history and financial execution. It entails significant execution risk. “
So the reward for a successful merger could be enormous. At the same time, if the mega-project fails, the price would be catastrophic. Not just for Switzerland, but for the entire global financial sector.
The Risks
UBS has identified several potential vulnerabilities. This includes merging two operational systems, streamlining the ailing Credit Suisse investment bank and merging employees and business cultures.
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“There are clearly parts of Credit Suisse that had a bad culture,” Kelleher said. “We will have to culture check all employees to make sure we’re not importing something into our ecosystem that’s causing problems.”
In addition, UBS will not be able to find out everything about Credit Suisse’s balance sheet before the merger is completed.
“Until we’re merged, we don’t have access to all the information. We have to be very careful with antitrust rules,” said UBS CEO Ralph Hamers (who is to be succeeded by Sergio Ermotti on April 5).
And then there’s the question of how much UBS can get for unwanted Credit Suisse investments in a market riddled with bank failures and rising interest rates.
According to former UBS manager Andreas Ita, who is now a managing partner at risk consultancy Orbit36, there are numerous aspects to consider at the operational level.
“The two companies work with different IT systems. The integration in this area will probably take years rather than quarters,” he told SWI swissinfo.ch.
“UBS will also take on the various pending legal cases of Credit Suisse.” These include potential lawsuits from holders of the so-called AT1 bonds, which have become worthless as a result of the takeover.
UBS is also tasked with placating the Saudi National Bank, Credit Suisse’s largest shareholder, which invested billions in the bank last year. Most of them were lost as part of the UBS takeover bid.
The politic
Whether intentional or not, UBS has been drawn into a political storm in Switzerland.
The government enforced the takeover by emergency law, relegating shareholders and bondholders to the sidelines. And billions in taxpayers’ money have been promised to cover potential UBS losses.
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Meanwhile, the government has ordered Credit Suisse’s bonus payments to be frozen. Parliament will hold an extraordinary session to consider the matter. Several commissions have announced that they will examine aspects of the banking crisis.
Many politicians are calling for Credit Suisse’s domestic retail banking business to be spun off into an independent entity. This could put politicians on a collision course with the bank, because UBS says it has no plans to break up Credit Suisse.
A job cut among the 16,000 employees of Credit Suisse in Switzerland is inevitable. At this point in time, UBS cannot say how many of these jobs will have to be cut. What is already certain, however, is that she will be under immense pressure to get as many as possible.
What’s next?
Major financial centers such as the United States, the United Kingdom and the European Union have given their general blessing to the deal after Swiss authorities intervened.
Lawyers are now haggling over the finer points with regulators and antitrust authorities in the 58 countries where UBS operates.
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UBS says it will be a few more weeks before it can unveil its concrete takeover plan to the public. The Swiss government wants the deal to be completed by the end of the year.
The Financial Times reports that UBS is already trying to untangle the situation by partially spinning off Credit Suisse’s investment banking business.
Can the takeover succeed?
Both Swiss banks have already taken over other banks in the past. In 1988, Credit Suisse bought the American investment bank First Boston. Ten years later, UBS was formed through the merger of Union Bank of Switzerland with Union Bank of Switzerland.
But that was before the 2007/2008 financial crisis, before the terms “Too Big to Fail” and “Global Systemically Important Bank” (GSIB) were coined.
“It is the largest single financial transaction since 2008,” says Kelleher. “I would argue that it’s bigger than any other transaction in 2008 because it’s the first time two GSIBs have merged.”
UBS says the acquisition of Credit Suisse will give it more clout in global markets, particularly in the US, Southeast Asia and Latin America. But those responsible also acknowledge that there are potential downsides.
If the merger succeeds, the megabank still needs to operate efficiently and generate profits.
Until more details are known about the final composition and strategy, it’s impossible to gauge how successful the new megabank might be.
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