By Tomasz Janowski, Oliver Hirt and John Revill
ZURICH (Reuters) – With the takeover of Credit Suisse officially completed, UBS must now deliver on its promise that the government-orchestrated bailout will benefit both Swiss shareholders and taxpayers.
The world’s largest banking operation since the 2008 financial crisis has forged a wealth manager with unrivaled global reach and $5 trillion in assets under management, giving UBS an overnight lead it would have otherwise took years to reach into key markets.
Staged over a weekend in March to avert a wider banking crisis, and backed by up to 250 billion Swiss francs ($281 billion) in public funds – the tie-up now poses huge challenges and potential rewards for Switzerland and its largest bank.
Switzerland now faces a bank with a balance sheet twice the size of its economy, while Sergio Ermotti, who was reintroduced as CEO to oversee the mega merger, faces tough strategic decisions as UBS integrates its small rival in an uncertain economic context. .
THE SWISS BANK
The first hurdle may be a politically heavy decision on Credit Suisse’s “crown jewel”, its domestic business.
Integrating this into UBS and combining the largely overlapping networks could generate significant cost savings and Ermotti suggested this was the baseline scenario for the integration.
But UBS will have to weigh that against public pressure to keep Credit Suisse’s business separate with its own brand, identity and, most importantly, its workforce. The unit had nearly 7,300 employees at the end of 2022 and an operating profit of 1.43 billion Swiss francs while the entire group suffered heavy losses.
A combined company would have a dominant position in the Swiss loan market, while public unease about a Swiss mega-bank could lead to even stricter regulation and capital requirements.
UBS said all options, which could include an initial public offering, are open, with a decision expected within months.
BLEEDING STAFF, CUSTOMERS?
UBS has underlined its intention to act quickly to prevent staff and client departures, as chairman Colm Kelleher recently signaled net gains in activity in some areas.
However, insiders speak of rivals aggressively courting Credit Suisse clients and employees. One said about 200 people leave the bank every week.
Investors, financial experts and analysts say maintaining and growing business while improving staff morale could be the biggest challenge of all.
Clients who would typically do business with UBS and Credit Suisse to spread their risk could now outsource some of that business elsewhere.
“One plus one will not equal two. A significant portion of assets will be lost and this will impact the profitability of the operation for UBS,” said Alan Mudie, chief investment officer at Woodman Asset Management.
Moreover, such a complex operation risks for the bank to withdraw into itself, to the detriment of innovation and customer service.
“My account manager is going to be more concerned with keeping his job than meeting my needs,” said Arturo Bris, professor of finance at the International Institute for Management Development (IMD) in Lausanne.
‘CULTURAL FILTER’
UBS, which has announced its intention to complete the integration of the two banks in three to four years, also said that its combined workforce – currently around 120,000 – will have to decrease.
UBS Chairman Kelleher has spoken openly about fears of “cultural contamination” and the application of a “cultural filter” to staff at Credit Suisse’s investment bank, citing inadequate risk controls and a growth and uncontrolled capital spending.
All of this contributes to uncertainty, which could make it harder for the combined group to keep top employees and recruit new ones, some observers warn.
“A redesign creates nervousness among all employees, including top performers,” said Lars Schweizer, professor of finance at the University of Frankfurt, adding that they were often approached by headhunters with offers. of competitors.
SKELETONS?
Although UBS has already provided a financial overview of the combined group and earmarked tens of billions of dollars for costs and potential losses resulting from the combination, it also warned that the numbers could change significantly over time.
UBS said it found no skeletons on the books of Credit Suisse, but only now will it have full insight into a bank that has suffered from years of scandals, loose oversight and, in March, of an admission of material weaknesses in its controls.
A potential risk stems from legal challenges to the decision of the Swiss authorities to cancel the AT1 special bonds issued by Credit Suisse. Although UBS is not a party to these lawsuits, it could increase its funding costs.
INVESTMENT BANKING HEADACHE
UBS executives have said they are aiming to drastically cut investment banking at Credit Suisse. Yet, one wonders how far and how quickly UBS will end its activities and at what cost.
The Swiss government provides a guarantee of up to 9 billion Swiss francs for potential losses related to the investment bank of Credit Suisse, in addition to losses of up to 5 billion francs that UBS has agreed to assume .
‘POISONED CHALICE’
Ermotti promised his team would “work very hard” to avoid any consequences for taxpayers and analysts say that with Swiss federal elections due in October, UBS needs to tread carefully.
On paper, UBS doesn’t appear to need public funds, with a financial cushion of nearly $35 billion from the purchase of Credit Suisse at a fraction of its book value.
Still, backstop talks held since the deal was announced on March 19 suggest UBS was keen to secure what Barclays called a “poisonous gift” because of the potential for political backlash.
While Ermotti played down fears that UBS was getting too big, Switzerland’s second-largest political party offered to drastically reduce its assets, saying the scale of the lender and an implicit state guarantee increased the risk of a another costly rescue.
($1 = 0.8889 Swiss francs)
(Reporting by John Revill and Oliver Hirt; Additional reporting by Noele Illien; Writing by Tomasz Janowski; Editing by Elisa Martinuzzi and Alexander Smith)