Is the Credit Suisse Acquisition a Good Deal for UBS?

UBS (NYSE:UBS) reached an agreement to acquire Credit Suisse (NYSE:CS) in an “emergency rescue” deal worth more than $3.2 billion. The takeover, pushed by regulators to prevent a banking crisis, initially pushed UBS shares. However, the stock erased earlier losses to trade higher on the day after several banks analysts, including Bank of America (NYSE:BAC) and HSBC (NYSE:HSBC), weighed in positively on the deal.

The historic agreement represents the first merger of systemically important global banks since the global financial crisis in 2008 when banks were forced to match with rivals, mainly due to regulatory pressures.

The government of Switzerland said it would offer over $9 billion to offset losses that UBS could incur during the takeover. In addition, the Swiss National Bank (SNB) initially pledged a $54 billion lifeline, which grew to more than $100 billion in liquidity to help UBS complete the merger.

Applying UBS’ ‘Conservative Risk Culture’

While the acquisition appears appealing to UBS shareholders, it is first of all a bailout deal, said UBS Chairman Colm Kelleher.

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure.”

Credit Suisse has been under severe pressure over the past year and the chance of its potential collapse had global banks worried due to the bank’s size and global footprint. The bank’s balance sheet stood at around 530 billion Swiss francs ($571.88b) at the end of last year.

The megamerger of two longtime Swiss rivals will create a massive lender, with over $5 trillion in total invested assets and “sustainable value opportunities,” UBS added in the release. Kelleher added that the acquisition of Credit Suisse’s wealth and asset management units will support the bank’s strategy of growing its capital-light businesses.

He further stated that UBS plans to shrink Credit Suisse’s investment banking unit to align it with UBS’s “conservative risk culture.” Moreover, UBS will also pause Credit Suisse’s stock repurchase program to facilitate the absorption of the deal.

Why Bail Out Its Biggest Rival?

While the merger with Credit Suisse is something UBS didn’t want, there are certain advantages the deal offers. First of all, Credit Suisse was UBS’s main rival for decades. Second, the embattled lender has a myriad of renowned wealth-management clients in Asia that align with UBS’s ambitions and business strategy in that region. Third, UBS is likely to identify ‘substantial cost synergies,’ according to Bank of America analysts.

“CS was the closest competitor to UBS in wealth management and Switzerland; and both banks are heavy in Swiss central costs. Being next door to one another, cost synergies could be substantial,” analysts wrote in an upgrade note on UBS.

On the other hand, Credit Suisse’s investment banking business is the ugly spot. The Swiss lender had been winding down significant parts of the business and had even intended to spin off the advisory business into a new firm spearheaded by former board member Michael Klein.

It is uncertain whether the spinoff will happen, though the Swiss authorities agreed to cover some of the losses that UBS might sustain in winding down the rest of the operations. Additionally, holders of Credit Suisse’s “additional tier 1” bonds are also facing losses as their holdings are practically wiped out.

These bonds are securities that act as bonds of a bank until that bank experiences financial issues, after which the bonds become worthless.

The End

The deal marks the end of an incredible 167-year journey for Credit Suisse. After the banking crash in 2008, the Swiss bank stood in a better position than many of its rivals, however, it struggled to adjust to how the crisis changed the banking industry.

More specifically, the bank heavily relied on its investment banking business, falling behind in its pivot to other, more stable lines of business.

“They felt, ‘We are the winner from the financial crisis, and everyone else is hurt,’” said Andreas Venditti, a banking analyst at Vontobel. “So they doubled down on these kinds of businesses and on investment-banking exposure in general.”

As a result, the bank’s past 15 years were plagued by scandals, litigation, and strategic pivots while its rivals became stronger and more regulated. Issues such as executive turnovers, multi-billion dollar losses, penalties related to tax and sanction evasion, and a fraud settlement over Mozambican loan sales dealt heavy blows to the Swiss lender, while its investors continued to lose confidence.

In the meantime, other banking giants took steps to adjust to the newborn banking system after 2008, shedding their nonessential businesses and focusing on their strengths. This includes Credit Suisse’s purchaser UBS, whose executives scaled back its investment banking unit that nearly killed the lender after a catastrophic bet on subprime mortgages. Instead, the bank focused on growing its wealth management business.

In contrast, Credit Suisse failed to complete such an overhaul, both in business and in culture, leaving the lender struggling to secure deals and trade flow amid strong competition from Wall Street giants such as Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM).

While the U.S. banking giants and other rivals continued to grow their balance sheets, Credit Suisse’s revenue continued to decline, with its sales hitting 21.6 billion Swiss francs in 2019, 25% less than UBS.

On top of that, the lender was involved in more and more scandals, which resulted in numerous fines and litigations against the bank, further hurting its performance. In the period between 2020 and 2022, the Swiss lender paid $4 billion in settlements.

In its most recent annual report, more than 12 pages were devoted to listing litigations, settlements, and government probes, according to WSJ.

Summary

UBS agreed to pay just over $3.2 billion to acquire its smaller rival Credit Suisse in one of the most significant M&A deals facilitated by national governments. The Swiss government and SNB will provide substantial incentives to UBS in order to take over CS after the company experienced outflows of as much as $10 billion a day last week.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.