UBS Group AG (UBSG.S) has announced that it anticipates a substantial financial impact of approximately $17 billion due to its takeover of Credit Suisse Group AG (CSGN.S). In a regulatory presentation, UBS revealed its projections as it prepares to complete the rescue of its struggling Swiss rival. The estimated negative impact of $13 billion is attributed to fair value adjustments, while an additional $4 billion is expected to be incurred from potential litigation and regulatory costs stemming from outflows.
Negative Impact and Potential Gains
UBS estimates a negative impact of $13 billion resulting from fair value adjustments to the combined group’s assets and liabilities. Additionally, the bank foresees $4 billion in potential litigation and regulatory costs associated with outflows. However, UBS also expects to book a one-off gain derived from the “negative goodwill” of $34.8 billion, as it acquires Credit Suisse at a fraction of its book value. This financial cushion will help absorb potential losses and could potentially boost UBS’s second-quarter profit upon the completion of the transaction.
Preliminary Estimates and Analyst Observations
While UBS has provided these estimates, it emphasizes that they are preliminary and subject to change. The bank acknowledges the possibility of booking restructuring provisions after the transaction concludes, but specific figures have not been disclosed. Analysts at Jefferies have independently estimated that restructuring costs, litigation provisions, and the planned winding down of the non-core unit could amount to $28 billion. Andreas Venditti, an analyst at Vontobel, noted the absence of restructuring provisions in the financial information and highlighted that they would be accounted for after the transaction closes.
Restrictions on Credit Suisse During Takeover
UBS has implemented various restrictions on Credit Suisse while the takeover is underway. The filing reveals that in certain cases, Credit Suisse cannot grant new credit facilities or credit lines exceeding 100 million Swiss francs ($113 million) to investment-grade borrowers, or more than 50 million francs to non-investment-grade borrowers. These restrictions aim to address the lapses in risk controls that Credit Suisse experienced. Benjamin Quinlan, the CEO of Quinlan & Associates, considers the limitations on lending standards to be reasonable given Credit Suisse’s recent challenges. Quinlan also points out that UBS will bear the risks associated with these limitations.
Additional restrictions prevent Credit Suisse from undertaking capital expenses of over 10 million francs and entering into certain contracts exceeding 3 million francs per year. Furthermore, the filing states that Credit Suisse cannot make any “material amendments” to employee terms and conditions, including remuneration and pension entitlements, until the deal is closed. While these restrictions may lead to certain clients leaving Credit Suisse, they are not expected to accelerate the pace of outflows, as UBS previously stated that Credit Suisse had already managed to stem asset outflows.
The Urgency of the Deal and the Rescue Package
UBS highlights that it was compelled to expedite the deal due to the worsening financial health of Credit Suisse. The bank had less than four days to complete the necessary due diligence amidst what it referred to as “emergency circumstances.” The agreement, reached in March, saw UBS acquiring Credit Suisse for 3 billion Swiss francs ($3.4 billion) in stock and assuming potential losses of up to 5 billion francs resulting from winding down part of the business. Engineered by Swiss authorities over a weekend, this shotgun merger marked the first rescue of a global bank since the 2008 financial crisis. Upon completion, the merger will create a wealth management powerhouse, boasting over $5 trillion in invested assets and a global workforce of more than 120,000 employees.
Backing from the Swiss Government
The Swiss government is providing substantial support for the deal, committing up to 250 billion Swiss francs in public funds. As part of this backing, the government guarantees up to 9 billion francs to cover potential losses on a specifically defined part of Credit Suisse’s portfolio. Despite this support, UBS suggests that a quick turnaround for Credit Suisse, which has faced scandals and losses leading to its near-collapse, is unlikely. UBS expects both the Credit Suisse group and its investment bank to report significant pre-tax losses in the second quarter and throughout the year.
Long-Term Integration and Management
Following the legal closing of the transaction, UBS Group AG plans to manage two separate parent companies: UBS AG and Credit Suisse AG. The integration process is anticipated to span three to four years, during which each institution will maintain its own subsidiaries, branches, and client relationships, as well as engage with counterparties. This phased approach aims to ensure a smooth transition while preserving the individual identities and operations of both UBS and Credit Suisse.
As UBS and Credit Suisse embark on this transformative journey, the financial landscape awaits further developments, including the realization of estimated financial impacts, the resolution of ongoing litigation and regulatory challenges, and the eventual integration of the two banking giants.