UBS Faces Tough Choice Over Credit Suisse’s Domestic Business
Summary
- Combined group would dominate parts of Swiss banking, but a full merger in Switzerland would likely involve thousands of job cuts
UBS Group has a quandary after buying Credit Suisse Group: Reward shareholders upfront by jettisoning the smaller bank’s Swiss domestic business, or prepare for a painful integration that would make it even more dominant in its home market.
Switzerland’s two largest banks by assets are combining after Credit Suisse lost the confidence of customers and investors and needed rescuing in mid-March. UBS Chief Executive Officer Sergio Ermotti has signaled that integration will start right away in overlapping areas such as global investment banking, but that all options are being considered for the Swiss business.
“The greatest generator of value is really going to be UBS keeping it and eliminating the overlap," said Octavio Marenzi, CEO of consulting firm Opimas. “It’s also the most radical and difficult thing to do."
UBS is uniquely positioned to generate cost and revenue synergies from the business, Marenzi said.
Some Swiss politicians say they want UBS to separate Credit Suisse’s Swiss arm and spare thousands of jobs that would be lost in an integration. Analysts are divided on the value of keeping or disposing of the business, which is the only profitable unit at Credit Suisse and is estimated to be worth about $12 billion on its own.
One option would be to spin the business off to UBS shareholders, who would be given stock in a separate listed unit. UBS also could offer shares through an initial public offering or sell the Swiss bank to another buyer.
UBS will also need to decide precisely what remains within the business. The unit encompasses Credit Suisse’s retail and business-banking operations. It also includes a wealth-management arm serving rich customers in Switzerland and a domestic investment bank that UBS has long coveted and could decide to keep.
Combined in full, UBS and Credit Suisse would control around 38% of overall Swiss loans, 39% of deposits and 57% of corporate lending, according to Jefferies analysis based on 2021 data. The analysts mapped out the two banks’ domestic branches and found 60% are within two-thirds of a mile from each other.
UBS was formed out of the merger of Union Bank of Switzerland and Swiss Bank Corp. 25 years ago. Like other countries, Switzerland sought to prevent any one bank from being “too big to fail" after the 2008 financial crisis by imposing additional capital requirements on systemically important banks.
Extra capital charges for the enlarged UBS have been waived by Swiss authorities in the short term but could be a drag in coming years, analysts say. Global regulators are also likely to impose additional capital charges because of UBS’s increased size and complexity. At the margin, that bolsters the case for not holding on to Credit Suisse’s local unit.
UBS has said it anticipates saving around $8 billion a year from the banks’ combined cost base by 2027, but hasn’t broken down how much of that could come from within Switzerland. Close to one-third of the two banks’ 122,000 total staff is based in the country.
Ermotti, speaking at a conference last week, said there would still be enough banking competition in the country even if the two institutions were fully combined. The former UBS CEO returned to the bank, and his old role, in April to lead the integration of Credit Suisse after overseeing an earlier deep restructuring at UBS.
The March deal came with a government waiver that exempted the merger from a standard regulatory review on competition grounds.
Keeping Credit Suisse’s Swiss bank would mean cost savings and more market share for UBS, said Thomas Hallett, a banks analyst at Stifel Financial’s Keefe, Bruyette & Woods. Hallett favors a disposal to realize value and free up capital, “given the higher returns available in other parts of the business."
An upfront gain for shareholders also would soften the blow of UBS halting share buybacks. UBS had planned to buy back more than $5 billion in shares this year but said in March that it would suspend the purchases because of the acquisition.
Moving slowly gives UBS some political breathing space to prepare for an integration in the country, said Marenzi at Opimas. Federal elections are scheduled for October. He said some politicians might grumble, but the deal was already signed off by the government and regulators when they forced the rescue.
“It’s hard for them to say to UBS: ‘Yes, you have to buy this bank and now you can’t do anything in Switzerland, you have to sell it,’" he said.
