UBS Set for Record Quarter, Plenty of Questions After Takeover

31 Aug 2023

Investors of UBS Group AG are preparing themselves for a remarkable and intense experience as the Swiss bank gets ready to announce its first quarterly results after acquiring Credit Suisse in an extraordinary government-backed rescue.

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After five months of accepting the agreement, CEO Sergio Ermotti is anticipated to announce an enormous and exceptional gain for the bank on Thursday. These gains will likely be accompanied by significant decreases in asset values, worth billions of dollars, as well as revelations regarding the fate of several thousand job positions.

Indicators of the integration of Credit Suisse, especially in relation to its wealth management business and the Swiss unit's future, will hold greater significance than mere numbers. Investors will also carefully examine Ermotti's remarks for any new insights into his strategic outlook for the only remaining global universal bank in Switzerland.

Further details regarding the acquisition: Additional information about the acquisition:

UBS to expedite Credit Suisse agreement as the $10 billion cushion nears its expiration.

UBS ready to assimilate Credit Suisse's national bank, abandon its label.

UBS predicts a $35 billion increase in profits from its investment in Credit Suisse, but cautions about potential expenses.

UBS plans to divest itself of hazardous Credit Suisse loans to clients in the Asian region.

UBS is set to reduce more than half of Credit Suisse's personnel. UBS is getting ready to trim down its workforce at Credit Suisse by over 50%.

An experienced UBS employee who previously led the company in transforming into a successful wealth management institution following its near-collapse during the financial crisis, Ermotti understands the political implications connected to the Credit Suisse agreement, for which he was appointed as the overseer once again. In an unexpected decision this month, UBS chose to willingly relinquish a safety measure that was previously negotiated as part of the acquisition, including a 9 billion-franc ($9.4 billion) government guarantee.

The choice decreases the possibility of negative political consequences and dissatisfaction among the general public as UBS is expected to achieve a significant financial gain of around $35 billion by purchasing Credit Suisse at a greatly reduced value compared to its book worth. Additionally, UBS plans to cut tens of thousands of jobs. This accounting profit is predicted to be one of the largest in banking history and may surpass JPMorgan Chase & Co.'s record-setting $14.3 billion in the first quarter of 2021, which stands as the highest profit achieved by US and European financial institutions to date.

Renouncing the government assurances could potentially simplify the process of merging Credit Suisse's Swiss operations with UBS. This matter is quite contentious as it would further solidify UBS's already powerful position within Switzerland. While UBS had previously expressed its desire to retain the local division, the October elections in Switzerland compelled its executives to downplay their intentions.

UBS is currently on the verge of making a positive decision to fully incorporate Credit Suisse's local bank, while gradually phasing out the Credit Suisse name in the nation, according to individuals who are knowledgeable about the situation. A potential announcement may coincide with the release of financial results on August 31.

In addition to making sure that millions of retail accounts move smoothly, the choice also impacts the employment of many individuals. Around 30% of the combined workforce of the large bank is located in Switzerland, although this includes workers who are situated in the country but function as part of corporate roles or in the areas of wealth and asset management.

At a global level, it is anticipated that around 35,000 positions will be eliminated, with the majority of them coming from Credit Suisse. Those working at the company have already been informed that there will be three rounds of layoffs in the current year. September and October are provisionally scheduled for two of these rounds, according to individuals who are knowledgeable about the situation. Ermotti revealed in June that 10% of Credit Suisse's workforce had departed since the acquisition.

The executives at UBS initially predicted that they could achieve a whopping $8 billion in savings, primarily through reducing staff by $6 billion and slashing expenses related to IT and infrastructure by about $2 billion. Now, after having had five months to thoroughly analyze the deal, UBS might be able to disclose more precise numbers on Thursday regarding the cost of merging everything together and the overall profits it will eventually generate.

UBS has been making efforts to retain Credit Suisse bankers in the field of wealth management. By merging their private banking and asset management divisions, UBS aims to reach the milestone of managing over $5 trillion for affluent individuals and institutional investors worldwide. However, achieving this goal depends on their ability to stop the ongoing reduction in assets at Credit Suisse, which began during the panic in March.

According to insiders, Credit Suisse experienced a total of 61 billion Swiss francs leaving their assets and a decrease of 67 billion francs in customer deposits during the first quarter. It is anticipated that there will be even more significant outflows in the billions during the second quarter. However, it might be challenging to fully comprehend these figures as UBS plans to combine the flow data for Credit Suisse without providing a specific breakdown by division, a source mentioned.

Making things more complex, the banks have traditionally had different approaches when it comes to recording the assets they manage. UBS puts emphasis on assets that generate fees, whereas Credit Suisse has a broader scope. Consequently, some decline in managed assets at the merged bank might be due to a reclassification, according to sources familiar with the situation.

While the prioritization of wealth management continues to be a key area of development for Ermotti, UBS is strategizing to withdraw from sizeable loans extended to high net worth customers of Credit Suisse in the Asia Pacific area. The complete extent of this withdrawal will be disclosed once earnings are published. This will entail a collection of assets that are challenging to evaluate accurately, such as long-term derivatives and swaps.

It will probably involve any trading positions or financings that Credit Suisse's investment bank has undertaken, which require more capital than UBS is willing to assign. The bank may also need to assess its involvement in debt deals where both banks acted as underwriters while they were still rivals.

UBS's choice to reject state guarantees means that it will not be under constant surveillance by the Swiss government or regulatory authorities regarding its choices regarding the disposal of unwanted Credit Suisse assets. This requirement was imposed as part of the backstop.

--With the help of Myriam Balezou.