UBS expects a $35bn gain in its accounting as a result from the state-brokered rescue Credit Suisse. This is lower than what some predicted. Separately, UBS disclosed $17bn worth of asset writedowns, litigation provisions, and other provisions.
In a US filing made on Wednesday, Swiss lender provided for the first-time its preliminary estimates of the financial impact. This is the largest bank merger since the Financial Crisis, and it could take up to four years for this deal to be finalised due to its complexity.
UBS has said that it should be able to make a $34.8bn gain in the accounting for the transaction. This is because they acquired their rival at a fractional value of the assets. The “negative goodwill”, or the difference between the fair value of net assets and the acquisition price, is calculated by subtracting $3.5bn from $38bn.
The theoretical profit of $57bn is less than this because of various factors, including changes in the fair market value for assets, pension liabilities, and adjustments because the two banks used different accounting standards.
Thomas Hallett, KBW analyst, said that the lower-than-expected equity and capital gains “nullifies some of the bull cases in our opinion and supports our more cautious stance towards UBS”. We believe that investors would be better off waiting until the situation improves.
The release reminds us of how much accounting noise we will hear at UBS for most of the next decade. This messiness will continue to last for many years,” said Mr. He.
The negative goodwill, however, will still provide UBS with a paper profit that it can use to offset the losses and integration costs associated with the deal. The Swiss government and regulator Finma have also controversially allowed the bank to write down $17.1bn in additional Tier One bonds — debt instruments which can be converted into equity — causing lawsuits from investors.
UBS stated in the filing that it would mark down Credit Suisse assets by $13bn and set aside $4bn for regulatory and litigation issues. It also indicated that an additional restructuring charge will be incurred after the deal closes.
Swiss mortgages, trading assets and assets from UBS’s investment banking business are the main assets that will be written off.
Anke Reingen is an analyst with RBC Capital Markets. She said that her calculations predicted a higher level of common equity tier 1, 15.4 percent, compared to the 14.2 percent disclosed by UBS on Wednesday.
After the release, there was not much change in stock.
In March, after years of scandals and losses, the Swiss established stepped in to help UBS save its struggling rival. This was in response to hundreds of billions in client withdrawals which threatened to topple Credit Suisse. To sweeten the deal, the state guaranteed SFr5bn of losses and provided over SFr250bn (approximately $278bn) in public funds.
Other details were revealed in the filing. UBS saved approximately $400mn when it cancelled a Credit Suisse bonus program that was tied to AT1 bonds. Credit Suisse has been banned from granting new credit lines exceeding SFr100mn, and SFr50mn, to junk borrowers.
UBS expects a $1bn gain on Credit Suisse’s global real estate assets, but this will be more than off-set by a loss of $2bn on its capitalised Software Assets.