UBS’s plan for Credit Suisse’s investment bank

Setting a historic precedent in the world of banking, UBS has completed the acquisition of Credit Suisse, its scandal-ridden rival.

Focused on mitigating risks, UBS is undertaking a challenging initiative rarely attempted before – dismantling the unprofitable and capital-intensive business to its very foundations.

Stripping back to basic foundations

UBS’s bold step could potentially have a ripple effect throughout the banking sector. Analysts, such as Justin Bisseker from Schroders, speculate that if UBS successfully minimizes Credit Suisse’s balance sheet without jeopardizing its value, other struggling banks like Barclays and Deutsche might follow suit.

UBS has remained somewhat tight-lipped about its specific plans for Credit Suisse’s investment bank. Still, one clear objective is for the merged investment banking entities to constitute no more than 25% of risk-weighted assets.

The question remains how UBS will reach this target, given that both banks’ investment branches were around 30% of group RWAs by 2022’s close.

Investors and analysts await more detailed insights from UBS, expected during its rescheduled second-quarter results announcement on August 31. The conjectures, however, have already begun, including predictions of potential cuts to Credit Suisse’s RWAs by two-thirds.

Navigating the challenges ahead

The complexities associated with this monumental task have been delegated to Bea Martin, former UBS group treasurer. Unlike Deutsche Bank and Royal Bank of Scotland’s previous investment bank scaling-down operations, UBS’s task is significantly intricate.

This is due to the simultaneous merger of two businesses and the need to address the riskier financial products once offered by Credit Suisse.

UBS has inherited systems, personnel, and a corporate culture quite different from its own, adding layers to the challenge. Furthermore, Credit Suisse’s more adventurous risk tolerance is at odds with UBS’s conservative approach.

The paths of UBS and Credit Suisse have diverged significantly in recent years, as highlighted by the comparison of their respective investment banks.

UBS’s investment branch, restructured to service its sizable wealth management business post-global financial crisis, consistently accounts for 25-30% of the group’s profits.

Meanwhile, Credit Suisse’s investment bank has largely hampered its performance, incurring an overall loss of $2.8bn in the past half-decade.

Crafting a new future

UBS’s strategy involves leveraging the “non-core unit” set up by Credit Suisse in its last strategic review. This unit aimed to wind down businesses and free up capital.

UBS intends to use this as a starting point for restructuring its newly acquired investment bank. The plan includes discontinuing certain business areas, such as leveraged finance, complex derivatives, and loans in regions where UBS lacks a presence.

However, UBS also recognizes valuable components within Credit Suisse’s investment bank. Areas with high-growth potential and the ability to convert business founders into wealth management clients are particularly attractive.

UBS has even made generous offers to retain a select group of Credit Suisse bankers, specifically in sectors like technology and pharmaceuticals, primarily in the US and Asia-Pacific.

As UBS embarks on this complex journey of integrating Credit Suisse, insiders hint that the process could take up to four years.

However, others involved in the discussions suggest that UBS’s strong management and dedicated integration team might speed up the process, potentially completing the transition within two years.