ZURICH (Reuters) – As UBS wraps up its takeover of Credit Suisse, the bank now faces the task of fulfilling its commitment to benefit both shareholders and Swiss taxpayers as part of the government-led rescue plan.
This landmark banking deal, the largest since the 2008 financial crisis, has created a powerhouse wealth management institution with unparalleled global reach and a staggering $5 trillion in assets under management. UBS now finds itself propelled to the forefront of key markets, a feat that would have taken years to achieve independently.
However, this merger, arranged over a weekend in March to avert a wider banking crisis and supported by up to 250 billion Swiss francs ($281 billion) in public funds, presents formidable challenges and potential rewards for Switzerland and its largest bank.
Switzerland now faces the task of managing a bank whose balance sheet is twice the size of its economy. Sergio Ermotti, who was reinstated as CEO to oversee the mega-merger, confronts critical strategic decisions as UBS integrates its smaller counterpart amidst an uncertain economic climate.
The first hurdle involves a politically sensitive decision regarding Credit Suisse’s prized domestic business. While merging this business with UBS and consolidating overlapping networks could yield significant savings, Ermotti must weigh this against public pressure to preserve the Credit Suisse brand, identity, and workforce. The unit boasted nearly 7,300 employees and generated a 1.43 billion Swiss franc operating profit in 2022, while the entire group suffered substantial losses.
A combined business would exert dominance in the Swiss loan market. However, concerns over the creation of a Swiss mega-bank may result in more stringent regulation and capital requirements.
UBS has declared that all options, including an initial public offering, are on the table, with a decision expected in the coming months.
Retention of staff and clients presents another challenge for UBS. While the bank emphasizes its intention to act swiftly to prevent departures, reports indicate rivals are aggressively courting Credit Suisse clients and employees, with an estimated 200 people leaving the bank each week.
Experts and analysts warn that maintaining and expanding business while improving staff morale could prove to be the most significant challenge of all. Clients, who typically diversified their risk by banking with both UBS and Credit Suisse, may now divert some of their business elsewhere. Consequently, UBS’s profitability from the deal may be impacted, as a substantial portion of assets could be lost.
Furthermore, the complexity of the integration process risks diverting the bank’s focus inward, potentially compromising innovation and customer service.
In addition to these challenges, UBS anticipates a reduction in its combined workforce of approximately 120,000 employees. Chairman Colm Kelleher has expressed concerns about cultural contamination and the need to apply a cultural filter to staff from Credit Suisse’s investment bank, citing issues with risk controls and unchecked growth and capital expenditure.
This uncertainty surrounding the integration could make it more difficult for the combined group to retain top performers and attract new talent, according to some observers.
While UBS has already provided a financial overview of the merged entity and allocated tens of billions of dollars to cover costs and potential losses arising from the merger, the bank acknowledges that these numbers may change significantly over time.
Although UBS claims to have found no irregularities in Credit Suisse’s books, gaining full insight into a bank plagued by scandals, lax oversight, and admitted weaknesses in controls will only occur now.
Legal challenges to the Swiss authorities’ decision to write off special AT1 bonds issued by Credit Suisse pose another potential risk, which could impact UBS’s funding costs, although UBS is not directly involved in these legal actions.
UBS executives have expressed their intention to drastically downsize Credit Suisse
‘s investment bank. However, questions linger regarding the extent and pace of the business’s wind-down and the associated costs.
CEO Sergio Ermotti has vowed that his team will work diligently to prevent any adverse consequences for taxpayers. Analysts argue that, with Swiss federal elections scheduled for October, UBS must proceed with caution.
On the surface, UBS appears not to require any public funds, as it has acquired Credit Suisse at a fraction of its book value, with a substantial financial cushion of nearly $35 billion. Nonetheless, discussions surrounding the backstop since the deal’s announcement on March 19 indicate that UBS was eager to secure what Barclays termed a “poisoned chalice” due to the potential for political repercussions.
While Ermotti downplays concerns about UBS becoming too large, Switzerland’s second-largest political party has proposed significant asset reductions, citing the bank’s scale and implicit state guarantee as factors that increase the risk of another costly rescue.
($1 = 0.8889 Swiss francs)
