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UBS’s Credit Suisse takeover: From crisis to success

UBS's Credit Suisse
UBS reported a net loss of $785 million for the June-to-September 2023 quarter, driven by costs tied to the Credit Suisse rescue deal, which came in at $2 billion

A recent yet noteworthy event in the banking industry has been the UBS Group’s acquisition of its Swiss rival Credit Suisse Group.

The acquisition took place on 19th March 2023, through an all-stock deal brokered by the government of Switzerland and the Swiss Financial Market Supervisory Authority. Credit Suisse, the then global banking major, got involved in a series of scandals, leading to market panic. Credit Suisse also saw its share price plunging after the leading shareholder, Saudi National Bank ruled out further investment into the bank due to regulatory issues.

The merger deal was rapidly agreed upon and implemented to prevent turmoil in the global financial markets. As the merger is about to complete one year, International Finance will evaluate the acquisition, and consider whether it has been a profitable endeavour.

Context, acquisition and challenges

Given the fact that Credit Suisse was in deep crisis and the timing of the merger deal also coincided with the closing down of three prominent American financial institutions (First Republic Bank, Signature Bank and Silicon Valley Bank), the marriage between the rivals saved the stock markets from utter chaos.

The acquisition of Credit Suisse by UBS had several strategic objectives. The first was to achieve synergies by streamlining operations, eliminating redundancies, and maximising resources to improve efficiency and cost-effectiveness. Additionally, it aimed to bolster market position and competitiveness by expanding the range of products and services offered, increasing the client base, and extending the geographic reach of the combined entity.

The acquisition aimed to mitigate risks and capitalise on growth opportunities in a highly competitive and volatile market. Ultimately, the goal was to create a stronger and more resilient banking conglomerate capable of navigating global financial challenges and seizing opportunities.

The process of merging two large financial institutions has been a complex and intricate undertaking filled with difficulties. Both entities had their own unique organisational cultures, business models, and operational structures, making it crucial to align and harmonise these aspects.

Minor bumps on the cost front

As of February 2024, UBS has announced its plan to restart share buybacks and find $3 billion more in cost savings from integrating Credit Suisse, as the bank now outlines the next phase of absorbing its fallen rival.

UBS now expects $13 billion in cost savings by the 2026 end, with half of it coming from slashing staff headcount. They had previously set a cost savings goal of over $10 billion. It is also worth remembering that since taking over Credit Suisse, UBS’ share price has jumped some 50%.

The bank has already completed the first phase of the Credit Suisse staff and other resources’ integration, but trickier stages will come now, in the form of thousands of job losses and the combination of different IT systems. UBS CEO Sergio Ermotti has already informed the media that the progress over the next three years would not be “measured in a straight line”.

However, UBS reported a net loss of $785 million for the June-to-September 2023 quarter, driven by costs tied to the Credit Suisse rescue deal, which came in at $2 billion.

UBS now predicts that the expenses will decrease in the coming months as the integration stages progress. However, the fact remains that when the merger happened, Credit Suisse was financially in a bad shape and now this legacy has fallen upon UBS.

Despite the third-quarter loss, shares in UBS gained 4% in Zurich, as the banking group went through a strong inflow of funds, a phenomenon which displayed high confidence from the clients.

“UBS saw $22 billion of net new money flow into its global wealth management business, as it gained new clients and won back assets from those who had pulled funds immediately before and after the emergency takeover. That figure includes flows into Credit Suisse’s wealth management unit, which turned positive for the first time in 18 months,” stated CNN, while mentioning about UBS attracting net new deposits of $33 billion, with two-thirds of the amount coming from legacy Credit Suisse clients.

Tactical staff downsizing

Any merger and acquisition activity comes with staff restructuring, along with the demon called ‘job losses’. As per the reports, UBS has intensified its efforts to reduce costs and increase earnings by aggressively cutting thousands of jobs.

The Swiss Bank aims to save $13 billion by 2026 by cutting gross costs. In August 2023, it announced plans to cut at least 3,000 jobs in Switzerland.

As of February 2024, the headcount at the merged group has been reduced to 112,842 employees at the end of 2023, down from 120,000 post the merger.

UBS has managed to reduce costs by $4 billion, partly through layoffs, and the process accounts for nearly one-third of the venture’s current targeted amount. In the 2023-24 fourth quarters alone, the company cut more than 3,100 positions, bringing its total headcount to fewer than 113,000.

UBS CFO Todd Tuckner has revealed that a significant portion of the latest round of job cuts consisted of staff who were formerly employed in Credit Suisse’s investment bank. These layoffs mostly occurred in the United States and the United Kingdom, with staffers from other parts of the world feeling the pinch too.

For the October-to-December 2023 quarter, UBS recorded a net loss of $279 million, marking its second consecutive quarterly loss, partially attributed to expenses related to the acquisition deal.

UBS’s team of managing directors now possesses 177 individuals. Only around 30 of them reportedly are from Credit Suisse. The number of people promoted to the managing director rank in UBS is now on a downward trajectory. In 2021, it was 208, followed by 183 the following year.

UBS’ effort to make its organisation leaner also coincides with weak customer demand and China’s economic slowdown. Relationship managers were among the posts that faced the elimination heat in Singapore and Hong Kong. These teams were purchased from Credit Suisse during the March 2023 merger.

Singapore and Hong Kong, which traditionally hosted China’s ultra-wealthy, saw UBS fighting low consumer demand and activity levels in 2023. The region’s profit before tax for the wealth management division decreased by 9% in the second quarter compared to the same period in 2022.

China’s rebound from COVID has entered into a stall, with the real estate crisis taking a toll on its economy further. China saw one of its weakest GDP expansion rates in decades (3% in 2022).

Other important metrics

In February 2024, UBS announced a big payout to shareholders. However, CEO Ermotti warned about his venture facing a substantial restructuring before reaping the benefits from its Credit Suisse takeover.

“The year 2023 was a defining year in UBS’s history with the acquisition of Credit Suisse. Thanks to the exceptional efforts of all of our colleagues, we stabilised the franchise and have made tremendous progress in the integration,” these were Ermotti’s statement in UBS’ earnings call, a confident one despite the bank reporting a net loss of $279 million in the final three months of 2023. There was a silver lining in this figure as it was less than the nearly $500 million forecast by analysts.

For the full year, UBS bagged a net profit of $29 billion in 2023. Ermotti also highlighted clients entrusting the bank’s global wealth management division with $77 billion in new assets since the Credit Suisse acquisition.

UBS suspended share repurchases after the acquisition and now plans to reinstate them in the coming months, with the plan to buy back up to $ 1 billion worth by the 2024 end. The venture will raise the dividend it pays to its shareholders to $0.70 per share for 2023, up from the 2023 tally of $0.55.

Still, Ermotti, while interacting with the analysts, preferred to express caution, as he said, “We need to deeply restructure. Our plan is not relying on overly optimistic assumptions about market activity.”

After the merger with Credit Suisse, UBS was able to save $4 billion in cost savings in 2023 and it has raised the target to $13 billion by 2026. However, according to the venture’s chief financial officer, Todd Tuckner, expenses are expected to remain high in 2024 as two-thirds of the integration costs are anticipated to be incurred this year.

UBS had the option of getting Credit Suisse listed separately across the stock markets. Nevertheless, it decided to fully absorb its former rival. Then it identified the problem area, which was Credit Suisse’s investment bank, as the division was at the centre of scandals and crises that brought the venture’s demise.

As per senior equity analyst Andreas Venditti, UBS has done a tremendous job with the Credit Suisse takeover as the business saw a strong increase in dividends, resumption of share buy-backs and higher cost savings target. However, he still believes that the financial institution needs to do a lot more to keep the momentum going.

Wealth management aspirations

With the Credit Suisse takeover, UBS got an unprecedented 25% of the deal-making fee pool in Switzerland in 2023, which helped the venture bring in $251 million in domestic investment banking fees which translates into a 24.9% market share. Bank of America came in second with $91 million in deal-making revenue (a 9.1% share).

The Swiss investment banking market has long been dominated by Credit Suisse and UBS, with Switzerland firmly establishing its ability to fend off the prominence of Wall Street banks in its domestic market.

As financial platform Dealogic decoded UBS’ deal-making successes last year, it found out that Credit Suisse’s revenues were added to these figures, suggesting the size of the Swiss market UBS will defend the merger. In 2022, Credit Suisse brought in 15.1% of the Swiss deal-making fee pool, while UBS grabbed 9%.

UBS’s 25% of the Swiss fee pool in 2023 was the venture’s biggest proportion on record as it bettered Credit Suisse’s 23.5% market share in 2014. In fact in the category of dealmaking, UBS has become a European giant post the Credit Suisse merger, as in terms of market share, only Spain-based Santander comes in the second position with 12% of the domestic investment banking fee pool.

Talking about the 2024 aspirations, UBS has set its eyes firmly on markets like the United States and Asia. The venture aims to achieve at least $5 trillion in invested assets across the world by 2028, a vision which was laid out during the presentation of the financial giant’s 2023 results. To realise the goal, the company will be required to add a minimum of $1.15 trillion from its current $3.85 trillion in invested assets.

The Swiss banking major aims to achieve $100 billion in net new assets (NNA) per annum through 2025 before optimising for greater capital efficiency to achieve $200 billion in NNA annually by 2028. UBS is also eyeing to reduce its underlying cost-income ratio to 70% by 2026, down from 87.7% at the 2023 end.

Asia will likely continue to play a prominent role in UBS’ growth roadmap. Let’s check the figures. UBS’ wealth management arm in Asia saw its assets surge by over $200 billion in 2023. Overall invested assets totalled $645 billion, marking an increase of 51%, or $217 billion, compared to $428 billion at the 2022 end.

Net new asset inflows were $13.5 billion for the fourth quarter. The bank recorded a pre-tax profit in Asia Pacific of $97 million in the 2023 fourth quarter, down 45.5%. This was driven by the consolidation of Credit Suisse revenues which were partly offset by lower net interest income. Loans decreased 4% to $45.8 billion, primarily reflecting $2.5 billion of net new loan outflows.

The bank’s cost-income ratio in the region also soared from 69.7% to 87.7%, coinciding with an expanded workforce, as the number of client advisors grew to 1,101 compared to 847 at 2022 end. Compared to Asia, UBS earned net new assets worth only $21.8 billion in other parts of the world.

UBS has recently undergone a revamp with the aim of achieving growth in Asia in a more diversified manner. Prior to the merger with Credit Suisse, UBS was already a dominant player in the Asia-Pacific region. Following the merger in March 2023, UBS gained access to the South APAC clientele of its now-defunct rival.

As per the reports, within its APAC wealth unit, UBS has set a deadline of end-2024 to complete the migration of Credit Suisse clients and products in Hong Kong and Singapore.

UBS was the top wealth advisor in the Asia-Pacific in terms of value and volume, stated GlobalData’s Deals Database, as the Swiss banking major advised on 32 deals worth a total of $27.7 billion in 2023. JP Morgan was placed second, advising on deals worth a total of $26.1 billion, followed by Citi, which advised on deals worth $21.8 billion.

GlobalData lead analyst Aurojyoti Bose said, “UBS was the top adviser by volume in 2022 as well. Meanwhile, its ranking by value took a massive jump and it went ahead from occupying the 27th position in 2022 to top the chart in 2023. UBS advised on seven billion-dollar deals, that also included one mega deal valued at more than $10 billion. Against this backdrop, UBS registered a 123.5% jump in the total value of deals advised in 2023 compared to 2022.”

When the Swiss government-choreographed merger happened between Credit Suisse and UBS, there were apprehensions about the move’s future, as Credit Suisse was marred by scandals and financial irregularities. Analysts were concerned about UBS’ future. UBS did experience consecutive quarterly losses, which was unprecedented in its history of operations.

By February 2024, the venture has also achieved a few other firsts, be it becoming a European giant in the field of deal-making or maintaining its status as the top wealth advisor in the Asia-Pacific region since 2022. At the same point of time, the venture has also been strategically brilliant, when it comes to restructuring the staff. Instead of blindly mass firing everyone, it has taken a detailed look at the talents in Credit Suisse who can help the Swiss banking giant to continue its expansion and has inducted those faces into their organisational folds.

CEO Sergio Ermotti sees his venture’s progress over the next three years not being something “measured in a straight line.” If no major bump comes in those three years, the much-debated Credit Suisse-UBS merger may very well turn into a much-celebrated one.

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