UBS salvages most value from Credit Suisse wreck

UBS (UBSG.S) Chair Colm Kelleher is buying Credit Suisse (CSGN.S) because he has to, not because he wants to. The 3 billion Swiss franc ($3.2 billion) rescue deal, brokered by Swiss authorities and announced late on Sunday, is designed to shore up confidence in the country’s financial industry rather than benefit the buyer. Even so, UBS is salvaging the most value from the wreckage.

The Swiss government, central bank and regulator FINMA concluded that a UBS takeover was better than letting Credit Suisse fail, which could have sparked a wider banking-sector panic. The job for Kelleher was how to avoid infecting UBS with its arch-rival’s problems.

 

He’s secured some handy protections. The all-share offer values Credit Suisse at 60 percent less than its closing share price on Friday, and at a fraction of its 45 billion Swiss franc book value at the end of last year. FINMA will also let UBS write off its target’s debt instruments, known as Additional Tier 1 (AT1) securities, boosting the combined group’s equity capital by about 16 billion Swiss francs. Meanwhile the government will cover up to 9 billion Swiss francs of losses, such as markdowns on Credit Suisse assets, past a certain threshold.

Thanks to a competition waiver, Kelleher can even keep Credit Suisse’s domestic unit, giving UBS a dominant position in local retail and corporate banking and allowing it to extract hefty cost savings. Chief Executive Ralph Hamers reckons the bank can cut about $8 billion of annual expenses by 2027. After deducting tax at 24 percent and capitalizing using a 10 percent discount rate, those savings have a net present value of about $60 billion - roughly in line with UBS’s market value before the deal.

 

Yet it’s a sign of Credit Suisse’s predicament that the deal is far from a home run. On a call with analysts late on Sunday, UBS executives stumbled over some of the numbers – perhaps unsurprising for a transaction negotiated over a weekend. Wealthy customers who have money stashed with both banks could move some of it to spread their risk, while UBS might have to ditch some of Credit Suisse’s dicier clients. Hamers and his team will have to rapidly shrink their new acquisition’s investment banking arm, a tricky task even in less jittery markets.

Longer term, Swiss authorities have concentrated more of the country’s financial risk in a bigger juggernaut. That means even more regulatory and political scrutiny. FINMA’s decision to write off Credit Suisse’s AT1 securities just four days after it declared the bank was meeting all its capital and liquidity requirements will only increase the alarm felt by investors in other European lenders.

 

A UBS takeover is preferable to the Swiss government nationalizing Credit Suisse or winding it down. And Kelleher has improved the chances of the rewards outweighing the risks. Whether it’s enough to soothe the wider financial sector is less clear.
 
CONTEXT NEWS

UBS will rescue Credit Suisse in a deal worth about 3 billion Swiss francs, Swiss authorities and the two banks said on March 19.

Shareholders in Credit Suisse will get one new UBS share for every 22.48 shares they currently hold. Based on UBS’s closing price on March 17 the offer values Credit Suisse shares at 0.76 Swiss francs each, well below the last closing price of 1.86 Swiss francs.

Credit Suisse’s 16 billion Swiss francs of Additional Tier 1 securities will be written off to zero, boosting the combined group’s regulatory capital.

The Swiss government will also grant UBS a 9 billion Swiss franc guarantee against losses arising from certain assets that it will get as part of the deal. The guarantee kicks in if losses exceed a threshold, which the finance ministry did not quantify.

The Swiss National Bank will offer up to 100 billion Swiss francs of liquidity support to UBS and Credit Suisse, plus a further 100 billion Swiss francs to the smaller bank backed by a federal guarantee.

UBS estimates that the combined group could reduce its annual costs by roughly $8 billion.