UBS completes acquisition of Credit Suisse, marking a major banking merger.
UBS, the Swiss multinational investment bank, has successfully finalized its acquisition of Credit Suisse, creating a global wealth-management powerhouse and solidifying the largest merger in the banking industry since the 2008 financial crisis. This milestone event signals the end of Credit Suisse’s independent existence after 167 years and sets the stage for UBS to undertake the complex integration of its former rival, which is expected to involve significant job cuts.
The acquisition, which was initially announced in March as an emergency rescue deal brokered by the Swiss government, positions UBS to reap substantial gains in the tens of billions of dollars. However, it also exposes the bank to potential markdowns on Credit Suisse assets and associated legal and regulatory costs. The closure of the deal follows UBS’s successful negotiations with the Swiss government, securing a 9 billion Swiss franc ($10 billion) guarantee against potential losses related to Credit Suisse assets.
As UBS Chief Executive Officer Sergio Ermotti assumes leadership of the combined bank, he faces the formidable task of merging two institutions with overlapping operations and determining which activities to prioritize. Regulators are still in the process of assessing the necessary adjustment to liquidity, capital requirements, and risk-weighted asset measures for the newly combined entity.
The Swiss government’s intervention was essential due to the limited time available for UBS to conduct due diligence and the presence of difficult-to-value assets on Credit Suisse’s balance sheet, which UBS plans to wind down. A recent agreement was reached whereby the government agreed to cover losses on a specific portfolio of Credit Suisse assets, representing approximately 3 percent of the merged banks’ combined assets after an initial 5 billion francs is absorbed by the bank.
While Ermotti has expressed confidence that the government guarantee will likely not be required, having state backing provides UBS with market confidence during this transitional phase. The completion of the acquisition grants UBS full access to Credit Suisse’s business, including its client base and loan exposures, empowering the bank to make informed decisions regarding the future of these operations.
UBS has projected its Common Equity Tier 1 (CET1) ratio, a crucial measure of capital strength, to be around 14 percent in the second quarter of 2023 and throughout the year. The bank anticipates that any operating losses and restructuring changes incurred by Credit Suisse will be offset by reductions in risk-weighted assets.
In its integration strategy, UBS intends to reduce risk within the investment bank and assume control of Credit Suisse’s client-related activities. Notably, UBS will implement more stringent risk tolerance and restrictions for specific types of loans and clients, particularly in challenging jurisdictions.
Ermotti has acknowledged that, due to differing risk appetites, UBS may not absorb all of Credit Suisse’s clients. Furthermore, Chairman Colm Kelleher has emphasized that employee evaluations will be conducted through a ‘culture filter’ to ensure alignment with UBS’s values.
“We will never compromise on UBS’s strong culture, conservative risk approach, or quality service,” stated the bank in an open letter signed by Kelleher and Ermotti. “Many are counting on us to make this acquisition work.”
The future of the Swiss domestic business, previously owned by Credit Suisse, remains undecided by UBS. Initially, UBS planned to fully integrate the local unit, but later reconsidered, leaving all options open, including a potential sale or spinoff. A decision regarding the fate of the Swiss domestic business is expected to be made in the third quarter of this year.
UBS is also in the process of developing detailed integration plans for each business unit and formulating a defined strategy for window-specific activities in a non-core unit by the fourth quarter.
Credit Suisse’s demise was ultimately sealed by years of losses and management failures, ranging from a high-profile spying scandal under former CEO Tidjane Thiam to substantial losses stemming from the collapse of Archegos Capital Management in 2021. Despite successive attempts to reorient the bank’s direction, client withdrawals escalated toward the end of 2022 and early 2023, following the failure of Silicon Valley Bank, resulting in the final unraveling of Credit Suisse.
The completion of the UBS-Credit Suisse merger marks a significant milestone in the banking sector, reshaping the landscape of global wealth management and setting the stage for UBS’s ambitious integration efforts. As the new entity takes shape, the industry will closely monitor the outcomes and repercussions of this historic banking merger.