Investors are reacting positively to the emergency takeover of Credit Suisse by Switzerland’s largest bank, UBS. The deal, viewed by many as a promising strategic move, could reposition UBS as a prominent player in the financial landscape, despite concerns of potential job losses and a complex integration process.
Promising opportunities amid risks
The takeover, completed for 3 billion Swiss francs (approximately $3.4 billion), has led to a rising wave of optimism among investors who share UBS Chairman Colm Kelleher’s vision of the opportunities and challenges the merger presents.
Many fund managers who own UBS stock are optimistic about the acquisition, some even terming it a “bargain.”
UBS acquired Credit Suisse in a rescue mission led by Swiss authorities, as the latter was on the brink of failure. The merger has resulted in a financial conglomerate with over $5 trillion in managed assets.
UBS anticipates the integration process could span three to four years, during which it will oversee two separate parent entities, UBS AG and Credit Suisse AG, each with its distinct subsidiaries and branches.
The UBS-Credit Suisse merger promises to accelerate UBS’s reach in key markets, a feat that would have taken years to achieve organically. “The acquisition was a lucrative deal for UBS given the insignificant cost,” said one investor.
In a regulatory filing last May, UBS outlined the potential costs and benefits from the merger. It estimated a $13 billion adverse impact due to adjustments of the merged group’s financial assets and liabilities.
Additionally, potential litigation and regulatory costs related to outflows could amount to $4 billion.
Nonetheless, these costs are expected to be more than compensated for by a 16 billion franc gain from the writedown of Credit Suisse’s AT1 bonds and $34.8 billion from acquiring Credit Suisse below its book value.
UBS also received a state guarantee to cover up to 9 billion francs in losses, providing a substantial risk buffer as it assimilates its new acquisition.
The road ahead for UBS-Credit Suisse and market response
However, UBS is also inheriting several challenges, including legal risks and possible departures of Credit Suisse’s top client advisers in the millionaire and billionaire business.
Despite this, fund managers are confident that in the long term, the benefits of the acquisition will outshine the risks.
UBS shares have increased 5.1% since the merger was announced, slightly trailing behind the STOXX Europe 600 Financial Services Index. This minor underperformance likely mirrors the market’s uncertainty about the merger.
Still, as the benefits of the merger become more apparent, analysts like Kian Abouhossein from JP Morgan anticipate a surge in UBS’s stock.
The takeover positions UBS as a powerful entity in wealth management, with expectations of attracting $150 billion in new client funds annually.
To put this into perspective, the volume equates to the total assets under management at Julius Baer every three years. Julius Baer replaced Credit Suisse as Switzerland’s second-largest wealth manager following the UBS-Credit Suisse deal.
Regardless, the fate of Credit Suisse’s Swiss business remains an open question. While public and political sentiment leans towards a spin-off to promote competition, insiders anticipate an integration into UBS.
Investors also favor such a move for Credit Suisse’s most profitable division last year, with a pre-tax profit of 1.4 billion francs.
