A Year After Credit Suisse’s Fall, UBS’s Path Is Lined With Temptation
Summary
UBS wants to use the Credit Suisse acquisition to expand its investment banking operations in the U.S. Above all, though, it needs to retain the focus on wealth management that is beloved by investors.
Those who win the lottery often spend the money unwisely. This is the risk UBS needs to keep in mind on the anniversary of its Credit Suisse windfall.
A year ago Tuesday, UBS said it would buy its embattled rival under the auspices of Swiss regulators, who wanted to end a banking panic. UBS ended up paying $3.6 billion in stock for a bank with an estimated tangible book value of $33 billion—even after write-downs, expected litigation costs and accounting adjustments. The odd skeleton still lurking in the closet probably won’t stop this being remembered as the deal of the decade. Shares in UBS are up 64% since.
But one big question lingers: How will the merger change UBS? After all, the lender already had a strategy that the market liked: a focus on wealth management.
Investors see this business as the holy grail in today’s regulatory environment. It requires little capital to generate high returns, and the fees tend to be less volatile than investment-banking income. Morgan Stanley has become the highest-valued major bank in the world because 48% of its 2023 revenues came from wealth management.
UBS can boast an even higher figure: 52%. This strength comes from adversity in the global financial crisis, when it needed to be bailed out after daredevil efforts to expand investment-banking operations in the U.S. left it exposed to subprime real estate. Humbled, the bank returned to asset gathering, gearing its investment bank mostly toward fulfilling the needs of wealthy clients. It had shrunk to account for only about a quarter of company revenue before the merger.
Credit Suisse went the opposite way. With its investment bank relatively unscathed by the GFC, risk-management relaxed, bonuses exploded, scandals popped up and fines accumulated. On average in the three years before its demise, its investment bank still accounted for about 40% of total revenue, surpassing the more reliable wealth and asset management business.
The memory of all this is why UBS now walks a tightrope in its postdeal strategy: It wants to use Credit Suisse’s operations to become the sixth largest investment bank in the U.S. Currently, it ranks number 25 in North America overall, according to Dealogic, but it has been adding senior dealmakers and expanding research coverage.
It isn’t just Swiss banks that have failed to penetrate this market, where incumbents such as JPMorgan and Goldman Sachs reign supreme. Incursions by Deutsche Bank and HSBC also ended badly. Barclays is engaged in yet another strategic overhaul.
UBS executives have made it clear that this time will be different, with the investment bank kept on a tight leash. The point of expanding it is to establish a larger footprint in the U.S. that lowers costs and helps bring family offices onboard, thus keeping the spotlight on wealth management, UBS Chief Executive Officer Sergio Ermotti said at an investment conference last week.
“I don’t see any reason for us to go away from this kind of niche. It’s quite unique," he said, referring to wealth management. “We are willing to sacrifice growth short term."
UBS’s culture of risk aversion does seem entrenched, but the path forward will be lined with temptations. Take the large number of U.S. firms that are now rolling over debt ahead of a maturity wall at the end of this year and the beginning of 2025. It is an attractive proposition for bankers willing to venture further into the financing game.
The UBS playbook remains clear, but it could still be hard to follow—particularly since good fortune has a way of breeding complacency.
Write to Jon Sindreu at jon.sindreu@wsj.com
