Top UBS managers were skeptical when they were asked to save their scandal-ridden competitor Credit Suisse. The deal, which was completed five months ago, has now made UBS Europe’s second most valuable lender.
UBS said on Thursday that the state-sponsored acquisition had led to a $29bn profit, a bank record quarterly profit. Sergio Ermotti, UBS’ chief executive officer, confirmed that UBS will be able to keep the “crown gem” of its rival – the domestic consumer bank – while cherry picking clients, assets and staff in the wealth management and investment banking divisions.
Stocks rose 31 percent this year, reaching their highest level since 2008. UBS has surpassed BNP Paribas in Europe, ranking it second after HSBC. It has also surpassed US lender Citigroup.
Ermotti, a senior analyst at Citigroup, told analysts that the Credit Suisse acquisition would accelerate their plans.
Since the merger was completed over a frantic week-end in march, UBS chairman Colm Kelleher has overcome political concerns about its dominant position on the market. The combined bank’s assets of $1.7tn exceed Swiss GDP.
The pair now faces the difficult task of integrating their businesses and matching the expectations of what appears to be one of the largest financial deals in history.
“Integrating Key Staff, Retaining Clients and Migrating Them to Its Own Systems, Credit Suisse’s Litigation Issues, was the solution. . . “This will require significant management and time attention,” said Andreas Venditti an analyst with Vontobel.
UBS’ record profit sparked anger in Switzerland as it prepares for general elections in October.
Cedric Wermuth is the co-president for Switzerland’s second largest political party, the Social Democratic Party. “UBS’s numbers are shocking,” he said. He called the takeover the “deal” of the century, which came at the expense and cost of the Swiss. The $29bn gain in accounting on the Credit Suisse acquisition — also known as badwill or negative goodwill — is a reflection of the fact that the $3.4bn price paid by Credit Suisse amounted only to 6 percent of its tangible book values.
UBS announced as well that the integration with Credit Suisse’s domestic Retail unit will result in 3,000 job cuts in Switzerland over the next few years. The group is expected to make further cuts to its combined workforce of more than 100,000 people. However, executives are keeping their plans under wraps to avoid any more controversy.
Wermuth stated: “It is not fair that the counter clerks pay the price for the irresponsible behavior of their managers.”
UBS had originally predicted that it would take four years to absorb Credit Suisse. This is shorter than what they have now said. Analysts feared the deal would put UBS’s long-term plans to grow its business in Asia-Pacific, and in the US, where Morgan Stanley is the largest wealth manager in the world, at risk. Yet in some areas, the deal will end up helping UBS grow its global footprint, not least in asset management and investment banking, where the executives have begun sifting through Credit Suisse’s business lines to identify which will be prioritised and which pruned.
UBS announced on Thursday that it would retain $9bn in risk-weighted investments from the defunct investment bank of its rival, while the remaining $17bn will be redirected to its “bad bank”, also known as Non core and Legacy.
Ermotti stated: “We will consolidate our position as a truly global wealth manager, and as the leading Swiss Universal Bank with a scaled-up investment bank and an increased asset management.”
He said UBS would invest in its wealth management division and offer incentives to advisors to try to recoup the $200bn in assets that Credit Suisse customers had taken from the bank during its final year.
He said, “[It] will not be easy but recapturing the most we can is our top priority.”
UBS reported that money has already started to return. The group’s wealth management assets increased by $8bn in July and august.
Even if there are still some skeptics, the trend has encouraged investors to be more optimistic.
Alessandro Roccati is an analyst with Moody’s Investors Service. He said that despite progress in clarifying the planned rundown and integration, the execution risk of the transaction would remain high due to its complexity and breadth. Ermotti and Todd Tuckner, the recently installed UBS chief financial officer, are betting on a further boost in the coming months when they can provide more details about when the bank will revive a share buyback programme paused because of the takeover.
Citi analyst Andrew Coombs stated that UBS’s higher than expected common equity Tier 1 ratio of 14,4 percent, a key indicator of the lender’s ability to absorb losses, was good for shareholder returns.
He said, “This suggests that buybacks may start earlier than anticipated in addition to the plans to increase the dividend.” He added that stock repurchases may resume in the first half next year.
UBS chair Kelleher spent most of last year working alongside Ralph Hamers, Ermotti’s predecessor , to try and convince US active fund managers that they should become major shareholders in the group as they tried to attract investors of the same caliber as Wall Street peers.
UBS’s chairman is trying to close a valuation gap with JPMorgan, the most valuable US lender. Kelleher also spent the majority of his career at Morgan Stanley.
It will be a difficult task. UBS’s price-to-tangible book value of 1, a measure of the premium investors place on the group, is less than half of Morgan Stanley.
Investors will want to know that UBS has avoided the cultural and operational pitfalls that come with a merger.
Jerome Legras is a managing director and head of Axiom’s Alternative Investments. He said, “The numbers remain incredibly messy.” For now, it’s hard to keep track of all the moving pieces.
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