S&P trims UBS' outlook to Negative on merger execution risk, Moody's place Credit Suisse on review
2 min read 21 Mar 2023, 05:53 PM ISTWhile lowering outlook on UBS, in the base case, S&P anticipates client churn at the combined entity, particularly in wealth management and Swiss banking, where both entities have significant client overlaps.Moody's placed Credit Suisse on review for upgrading all long-term ratings and assessments. The outlook for the company and its rated subsidiaries was changed to ratings under review from negative.
PremiumS&P Global Ratings lowered its outlook on UBS Group AG to 'Negative' from the earlier 'Stable' outlook due to execution risk in the acquisition of embattled Credit Suisse. On the other hand, Moody's Investors Service placed Credit Suisse on review for an upgrade of all long-term ratings and assessments. Led by Swiss regulators both UBS and Credit Suisse this week agreed to a $3.25 billion merger for restoring confidence in the country's economy and banking systems. UBS to takeover Credit Suisse by end of 2023.
S&P rating on UBS:
Apart from UBS Group AG, the rating agency also gave a 'Negative' outlook to UBS Americas Holding LLC, the UBS group's nonoperating holding companies.
S&P sees material execution risk in UBS' integration of Credit Suisse (CS).
In its rationale, S&P said, "we see material execution risk in integrating CS into UBS given the size and weaker credit profile of CS and particularly the complexity in winding down a large part of CS' investment banking operations. This could mean a weakening of the combined group's competitive position or underperformance against its financial targets because of sizeable restructuring or litigation costs, pressure on revenue capacity, or setbacks in realizing cost savings."
In the base case, S&P anticipates client churn at the combined entity, particularly in wealth management and Swiss banking, where both entities have significant client overlaps.
Also, S&P believes the tail risks to UBS' capitalization are low overall due to significant downside protection through the terms of the transaction. UBS is paying Swiss franc (CHF) 3 billion (about $3.2 billion) for CS, a fraction of CS' tangible book value of CHF42 billion at year-end 2022.
According to the rating agency, this will likely result in the realization of material badwill, even after the revaluation of CS' balance sheet.
Further, S&P expects BS will prudently execute and manage the integration, reduction of staff, and wind-down of assets, while effectively limiting tail risk to the capital, risk, and funding profiles.
S&P took note that CS' stand-alone creditworthiness is significantly weaker, but it believes that UBS has sufficient downside protection to effectively shield against elevated risks emerging from the acquisition and following integration.
Moody's action on Credit Suisse:
On Monday, Moody's placed CS on review for upgrading all long-term ratings and assessments. The outlook for the company and its rated subsidiaries was changed to ratings under review from negative.
Moody's review will focus on the ultimate legal and regulatory structure for UBSG following the completion of the acquisition and the likelihood of affiliate support from UBSG for each rated CSG entity. Also, it will focus on the anticipated fundamental credit profile of the combined UBSG-CSG entity, which is expected to be stronger than the current credit profile of CSG.
Notably, the ratings could be upgraded if the merger between CSG and UBSG is completed and Moody's concludes that CSG creditors are likely to benefit from the stronger fundamental credit profile of the combined group.
