‘It would be the last resort’: Why a UBS/Credit Suisse merger could be bad for business

As far as mega-mergers go, the one between Credit Suisse and UBS could be one of the biggest to date, if it comes to fruition.

But is this logical, even if it is tempting to suggest that the wealth management offer of the two firms is complementary?

It could be a poisonous gift for UBS, whose market capitalization currently stands at $51 billion compared to Credit Suisse’s $12 billion.

Given Credit Suisse‘s weakened position, it’s also likely to be a takeover rather than a merger between two equals, meaning its top management would eventually have to leave.

“That would be the very last solution. I don’t think Swiss regulator Finma would want to have a Swiss mega-bank, given UBS’s troubles during the global financial crisis,” said Filippo Alloatti, chief financial officer at Federated Hermes.

Peter Berger, senior equity analyst at Basler Kantonalbank, does not see the takeover as likely, especially since UBS would dilute its margins. “UBS is in a completely different world and Credit Suisse is in trouble. Another reason is that UBS would be taking a big reputational risk,” he said.

Figures in the spotlight

From an analyst’s perspective, some key financial metrics suggest it would take more for both management teams to agree to the deal. UBS’s net revenue at the end of 2021 was $37.2 billion, compared to $22.4 billion at Credit Suisse. The number of employees is almost equivalent, with UBS having 71,000 employees and Credit Suisse 67,000.

“Credit Suisse and UBS have roughly the same number of employees. Although revenues were well below UBS and reported a huge loss [last year] while UBS reported a substantial profit,” Berger said.

The merger is unlikely to be popular with the Swiss public and politicians, given that thousands of jobs would be at risk in retail banking alone. The human capital of both companies would also be at risk, even in the promising segment of wealth management.

Iqbal Khan, head of wealth management at UBS, once held the same position at Credit Suisse, but it would be difficult to align the two divisions, especially since Khan was the subject of the spy scandal that has led to the resignation of Tidjane Thiam from Credit Suisse.

UBS itself has gone through several wealth management shakeups in the recent past, the latest being the departure of Tom Naratil as head of US wealth management.

Both banks are proud of their chief investment offices, led by Mark Haefele and Michael Strobaek, and it’s hard to imagine that these units could be easily brought together.

Look at the bright sides

As unlikely as it may seem, the idea of ​​the merger is attractive to some investors because it would cut costs and streamline some divisions between the two companies.

“Both companies share a similar business mix with a large wealth management business, significant domestic operations in Switzerland and a smaller investment banking division,” said Guy de Blonay, the Jupiter fund manager. Financial Opportunities.

It could also be a cheap offer for UBS. Citywire+ rated Ian Lapey, the fund manager of the Gabelli Global Financial Services fund, said they could offer CHF8 per share, which could mean more than 80% premium for shareholders.

“It would mean that long-suffering Credit Suisse shareholders could get a reward. And with such a large discount, you can fund the restructuring involved in merging the two companies,” Lapey added.

A troubling overlap is Swiss retail banking, which in Lapey’s view the company could solve by selling branches or divesting Swiss bank Credit Suisse to its shareholders and letting UBS buy everything else.

“From a regulatory perspective, I think the merger is doable. The biggest issue is whether the management teams want to do it because it’s a huge amount of work,” Lapey said.

“It’s something that would be very beneficial for the shareholders of both companies, but not necessarily for the employees, which I think is probably the biggest hurdle on both sides.”

Will they, won’t they

Although the merger is a possibility, Credit Suisse still seems to have some leeway. The bank’s capitalization ratio remains at 13.5%, well above the 10% requirement.

“But if the $3 billion net loss for this year – as some analysts had predicted – holds true, then that number would come down, closer to 12%. This could trigger a reaction from Finma,” Berger said.

So far, the regulator has been relatively soft, but if Finma were to act, it would not bode well for the bank, even though it has not yet experienced a mass exodus of customers.

“This could cause investors who are still with the company to wake up and realize that the situation is difficult, prompting them to sell their shares, which could even make the situation worse,” Berger added.

Despite solid capitalization figures, profitability remains a weak point, which is why many efforts have been concentrated on the restructuring of its investment bank, whose income has fallen by 47% year-on-year.

“The loss-making investment bank consumed 254 billion francs on Credit Suisse’s 727 billion franc balance sheet in the second quarter,” said Alloatti of Federated Hermes.

“Substantial downsizing, including through sales and exits, would have the effect of significantly reducing the group’s total funding requirements, with the potential in turn to improve debt funding costs,” he added.

On paper, Credit Suisse has the right people to do it, with CEO Ulrich Körner having turnaround experience at UBS, and CFO Dixit Joshi doing something similar at Bank of Ireland.

The current valuation already reflects the view that Credit Suisse will need to tap the markets at some point to fund the restructuring of its investment bank.

“Market commentators have recently suggested that the securitized products unit has already attracted the interest of several investors,” Jupiter’s De Blonay said.

Besides downsizing, Berger of Basler Kantonalbank sees splitting off parts of the business or creating a “bad bank” as alternatives to merging with UBS.

“One thing is certain: Credit Suisse is a sick patient and it has to do something,” he said.

Persistent risks

Much will hinge on the third quarter results released on October 27, because if management fails to produce a comprehensive restructuring plan, the company’s woes will worsen and merger options would be back on the table.

“A merger would be the least bad end of the game for the Swiss banking industry and therefore the reason the Swiss National Bank might push it,” said Alloatti of Federated Hermes.

Along with unsubstantiated questionable tweets, damage to the franchise is the main risk, according to Alloatti, given that the bank has faced problems for several years.

“Franchising is essential for wealth management and also investment banking, where there has been a high number of senior executive departures.” A deteriorating franchise hurts revenue, which exacerbates the cost problem,” he added.

De Blonay said the risk of a prolonged bear market environment would be difficult for wealth management and investment banking if the bank did not sell non-core assets.

“Management has already taken action on this front with a new savings target announced last July. But if revenues continue to be under pressure, more will have to be done to avoid a major capital increase,” he added.

However, all is not catastrophic. Massimo Baggiani, who runs the NEF Ethical Global Trends SDG fund and has exposure to Credit Suisse, said that while the franchise was suffering, it would take a lot longer to tarnish it permanently.

He said the big red flags were already out and expectations were low, given credit default swaps at record highs and rumors circulating that the bank was on the verge of collapse.

“No one can ever know if a big loss is hidden in a bank’s book. However, after everything that’s happened to Credit Suisse and its management turnover, I would look elsewhere for any big holes,” he said. he declared.

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