UBS’s Takeover of Credit Suisse Was a Steal. Now Comes the Bumpy Part. | Mint

UBS’s Takeover of Credit Suisse Was a Steal. Now Comes the Bumpy Part.

UBS’s Takeover of Credit Suisse Was a Steal. Now Comes the Bumpy Part.
UBS’s Takeover of Credit Suisse Was a Steal. Now Comes the Bumpy Part.

Summary

The Swiss bank recorded its first loss in nearly six years and will take a long time to integrate its once-rival, even as gains materialize.

UBS’s first loss in nearly six years shouldn’t make investors take their eyes off the road.

While the Swiss bank said Tuesday that third-quarter net income was a negative $785 million—almost twice as large as the median analyst forecast—its shares rose about 3% in early trading. Investors are wise to look through the fog and see that this was another set of encouraging figures.

Yes, the one-off gain of $29 billion that resulted from UBS buying its rival Credit Suisse at far-below book value is now in the rear window, having been recorded in the second quarter. What is left now is the unpleasant bit: integration costs, which were a steeper-than-expected $2 billion, and the day-to-day operations of a bank that was unprofitable when it was acquired and remains so. This resulted in a big loss in the new “noncore and legacy" division, which contains the positions and businesses UBS wants to dispose of.

Under the hood, however, the engine is already coming back to life. Excluding the impact of the acquisition, the bank’s pretax income would have been $844 million, executives said.

An even more important gauge of health is the wealth-management division—the cornerstone of any Swiss bank. Rich customers added $18 billion in net money to the UBS side of the business, and they are also returning to Credit Suisse. The bleeding that imperiled the latter bank’s very existence before its rescue takeover has been stopped even before both businesses are fully merged. In the final quarter of 2022, wealth-management clients pulled an eye-watering $95 billion in net assets from Credit Suisse. In this latest quarter, they brought back $3 billion.

In the Swiss business, both banks recorded an increase in deposits, despite fiercer competition for higher-yielding savings vehicles. UBS confirmed in August that, despite some lawmakers’ antitrust misgivings, it will retain Credit Suisse’s domestic bank—likely the juiciest bit of the acquisition.

Also, UBS has already achieved $3 billion in annualized cost savings, which was a target previously set for the end of the year. Executives still expect the cost-to-income ratio to fall below 70% at the end of 2026, from 89% today.

Of course, this is only the beginning of a long journey. Though more cost-cutting is possible in the months ahead as duplicate positions are removed, some big changes such as fully integrating IT systems may need to wait until the companies’ significant legal entities are merged. This is scheduled for the end of 2024.

“It’s probably the one time in which we are going to incur the most costs in order to achieve the synergies we want in 2025 and 2026," UBS Chief Executive Officer Sergio Ermotti told analysts in a conference call Tuesday.

Indeed, the combined banks’ legacy book amounted to $77 billion in risk-weighted assets at the end of the third quarter. If UBS simply waits for these to mature, the book would still amount to $39 billion by the end of 2026. Outright sales are possible—$4.8 billion have been reduced in this way relative to the second quarter—but must be done carefully. This underscores how slow the process of integrating a behemoth like Credit Suisse will be, even if it remains the case that no nasty skeletons are found in the trunk.

Meanwhile, the sprawling complexity of the current operations holds back UBS. In the third quarter, for example, the bank paid $526 million in taxes despite recording pretax losses of $255 million. This was a result of legally operating in a string of different jurisdictions without having the ability to offset income and losses in each one of them. The tax rate will only be gradually brought back to below 25% following legal mergers, executives said.

This long, winding road is set to test the market’s patience. But with such large financial gains attached to it, the trip is sure to be worth it.

Write to Jon Sindreu at jon.sindreu@wsj.com

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