UBS Signals Cost Efficiency Drive After Profiting $29 Billion from Credit Suisse Deal

Sergio Ermotti, UBS Chief Executive Officer, is meticulously navigating the execution of one of the largest mergers in global finance history.

UBS Group AG has unveiled its ambitious plans for the integration of former competitor Credit Suisse, which encompasses domestic job cuts of around 3,000 positions and a target of over $10 billion in cost savings. This announcement coincides with UBS reporting the largest-ever quarterly profit for a bank, attributed to its recent acquisition of Credit Suisse which concluded in June.

The bank’s headquarters in Zurich disclosed a remarkable profit before tax of $29 billion in the second quarter. This significant figure is a result of the accounting disparity between the $3.8 billion that UBS paid for Credit Suisse and the valuation of the acquired lender’s balance sheet. Notably, UBS confirmed that the local unit of Credit Suisse will be fully integrated into the parent company, and the brand itself will be retired by 2025.

Sergio Ermotti, Chief Executive Officer, is meticulously navigating the execution of one of the largest mergers in global finance history. This endeavor requires balancing the opportunities stemming from a client asset base exceeding $5 trillion with the challenges arising from the flawed business model inherited from Credit Suisse. The urgency of this merger was underscored when Credit Suisse faced impending bankruptcy as clients lost trust in the 167-year-old institution.

Ermotti stressed the pragmatic approach, stating, “There is no room for nostalgic considerations. We are executing on the strategy; we are making very good progress.”

Investors and clients appear to be in alignment with UBS’s approach, as shares have surged by more than a third this year, reaching heights not seen since the financial crisis of 2008. On Thursday, shares in Zurich experienced an increase of as much as 7.2%.

As evidence of the job reduction strategy, Ermotti revealed plans to eliminate approximately 1,000 positions in Switzerland due to overlaps in domestic banking activities. An additional 2,000 roles are anticipated to be eliminated in the country’s group functions.

Although the exact global scope of job cuts remains uncertain, the acquisition of Credit Suisse has propelled UBS’s workforce to around 120,000. The bank ultimately envisions reducing this workforce by approximately 30%.

UBS also communicated its decision to shut down two-thirds of Credit Suisse’s investment bank, including a significant portion of its trading operations. This strategic decision aligns with UBS’s intent to divest from businesses that do not align with its existing strategy.

Notably, the accounting gain for the quarter outshines JPMorgan Chase & Co.’s $14.3 billion profit in the first quarter of 2021, marking a modern record for US and European lenders. Analyst Nicolas Payen from Kepler Cheuvreux noted that while the $29 billion accounting gain was lower than anticipated due to Credit Suisse’s operational losses and adjustments to the purchase price, the stabilization of the business was occurring at a faster pace than expected.

Ermotti, a UBS veteran who steered the bank toward becoming a model wealth manager after the near-collapse during the financial crisis, is acutely mindful of the political sensitivities surrounding the Credit Suisse deal. In a surprising move, UBS recently voluntarily relinquished a government-backed safety net, a component of the acquisition agreement worth 9 billion Swiss francs ($9.4 billion). This strategic shift affords UBS greater flexibility, particularly concerning its domestic franchises.

Although UBS’s business fundamentals remain strong, the bank is now priming investors for the intricate process of integrating Credit Suisse, slated to be substantially completed by the end of 2026. The bank aims for a cost-to-income ratio of below 70% by the conclusion of 2026. However, this integration process entails the complex transition of Credit Suisse’s clients, assets, and infrastructure.

Ermotti clarified that around half of the projected $10 billion in cost savings by 2026 will originate from restructuring the investment bank and winding down non-core assets. The remaining half will be derived from initiatives across other operational domains.

Furthermore, the investment bank indicated its intention to dismantle two-thirds of Credit Suisse’s investment bank, including most of the trading operations. This strategic decision is aligned with UBS’s strategic goal of divesting from businesses that do not align with its overarching strategy.

UBS also acknowledged that the wind-down unit, housing businesses transferred from Credit Suisse that are not congruent with UBS’s strategy, held approximately $55 billion of risk-weighted assets at the end of the quarter. During the quarter, UBS successfully exited $8 billion worth of positions from this unit.

The bank’s global wealth-management sector continued to observe robust inflows, with the reported $16 billion marking the highest second-quarter figure in over a decade. Credit Suisse’s wealth unit saw a turnaround in client fund flows, which turned positive in June. The reported financials reflect Credit Suisse’s final quarter as an independent entity. Analysts at Vontobel Holding AG noted that UBS faces an extensive undertaking in restructuring Credit Suisse, encompassing staff integration, client retention, migration to UBS’s systems, and resolution of Credit Suisse’s legal matters. This complex process necessitates considerable time and management focus.