UBS Should Benefit From Credit Suisse Takeover

A week can be a very long time in financial markets. UBS acquiring Credit Suisse for CHF 3 billion a week ago would have seemed like a terrific deal. Now the position is less clear. Credit Suisse likely experienced significant net outflows of client assets last week, eroding its revenue base. We, however, believe that UBS can extract value from the acquisition.

It is in a much better position to execute a radical restructuring of Credit Suisse’s business than Credit Suisse was. We calculate that the UBS 2027 cost savings target would reduce Credit Suisse’s 2022 adjusted operating expenses by around 60%. The restructuring will come with material costs, but UBS is better placed than Credit Suisse to absorb this. The challenge for UBS will be to keep revenue attrition to a minimum during the restructuring period. In a surprise move, the Swiss regulators wrote down the value of Credit Suisse CHF 16 billion additional tier one or AT1 capital to zero, providing UBS with additional capital to absorb markdowns and restructuring charges. In addition, the Swiss authorities will provide a further CHF 9 billion of downside protection. The combined CHF 25 billion of downside protection plus, if needed, liquidity support from the Swiss Central bank should hopefully ensure that UBS wholesale funding costs remain in check. The suspension of UBS’s share buyback program is negative, but it could have happened regardless, given current market conditions. We will update our fair value estimate for UBS shortly.

UBS looks set to keep all of Credit Suisse’s businesses except the securities trading operations, which it will wind down. UBS is looking to move quickly to wind down the securities business, but it did warn in the conference call that some positions have very long durations. UBS confirmed that it has clearance from the Swiss competition authority to retain Credit Suisse’s Swiss banking operation. We view this as a positive. Credit Suisse’s Swiss bank is a high-quality franchise and, together with UBS, will have a very dominant position in the Swiss market. It seems that UBS scrapped the Credit Suisse First Boston carve out.

Credit Suisse shareholders will feel shortchanged, but salvaging at least something is the best outcome under current circumstances. According to the Financial Times, Credit Suisse was losing deposits at a CHF10 billion a day run rate. Despite the liquidity support from the Swiss central bank and Credit Suisse’s previously sound liquidity position, its viability as a going concern was clearly under threat. The write-down of AT1 capital confirms that shareholders were fortunate not to be wiped out completely. In theory, AT1 capital should be senior to common equity.

Johann Scholtz March 2023



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