What impact will the acquisition of Credit Suisse have on UBS?

20.03.2023 13:46|Analyst Team, Conotoxia Ltd.

On Sunday (19.03), UBS announced the acquisition of Credit Suisse bank for more than $3.24 billion. Colm Kelleher, chairman of UBS, said it was an "emergency rescue" for Credit Suisse, while UBS sees the deal as an investment opportunity. UBS says the merger will have a positive impact on the bank's profits, with savings of $8 billion a year by 2027. Credit Suisse is to be wound down as part of the acquisition, and the integration of the two banks will take about four years. What can we expect from the acquisition and what impact will it have on UBS?

A few words about UBS and the Credit Suisse situation

UBS (United Bank of Switzerland) is an international investment bank that provides financial services to individuals, companies and institutions worldwide. The bank offers a wide range of products, including private banking, corporate banking, asset management, investment services, M&A advisory and project finance.

UBS was formed in 1998 from the merger of two Swiss banks: Union Bank of Switzerland and Swiss Bank Corporation. Today, the bank is headquartered in Zurich and operates in more than 50 countries around the world, with more than 70,000 employees and it is the largest private Swiss bank.

For more than a year, we have heard about the problems of the second largest Swiss bank, Credit Suisse, which has been struggling with, among other things, numerous lawsuits, money laundering scandals, which has caused customers to lose confidence in the bank and start withdrawing funds from the bank. Previous banking crises were caused by hidden losses, which does not seem to be the case for Credit Suisse. According to investment firm Axiom Alternative Investments, the bank is regarded as the weakest link among global systemic banks. And its problems stem from the fact that its customers have chosen to withdraw funds from their bank accounts. Credit Suisse Bank has experienced a $270 billion reduction in the value of its assets in just the past year alone, a 32% drop as a result of a more than 50% drop in its $215 billion cash holdings. These problems have led to the share price falling from CHF 14 to CHF 2 (a drop of as much as 85%).

Source: Conotoxia MT5, Cred. Suisse, Daily

What impact will the acquisition of Credit Suisse have on UBS?

Following speculation and concerns about the banking crisis, UBS has decided to take over its long-standing Swiss rival. UBS CEO Colm Kelleher defined: "This acquisition is attractive to UBS shareholders, but let's be clear, as far as Credit Suisse is concerned, this is a crisis rescue." The acquisition will be for $3.24bn, which, with the bank's current market capitalisation of $6.26bn, could be a long-term opportunity for UBS. Nonetheless, investors seem to be taking it negatively, as UBS shares have fallen by more than 17% since the beginning of March. We could assume that the takeover decision has been driven by fears of a possible panic of a massive capital outflow from the Swiss banking sector. It seems that the takeover could not take place without drastic restructuring decisions, which may include numerous cost-cutting measures through, among other things, staff cuts.

Source: Conotoxia MT5, UBSGroup AG, Daily

UBS appears to be able to take over Credit Suisse and provide it with liquidity without too many problems. UBS's cash is worth $204 billion, so the purchase of Credit Suisse alone is only 1.5% of the bank's cash holdings. However, it is important to remember that with the acquisition of the bank's assets, UBS will take over its liabilities and problems. However, if UBS manages to restructure successfully, it will be able to talk about taking over one of its key competitors.

An inevitable coincidence with the collapse of the SVB

It might seem that the problems in the US banking sector caused by the collapse of Silicon Valley bank SVB were a prelude to the announcement of Credit Suisse's lack of liquidity. However, it is important to stress that the problems of the two banks are distinct from each other. The collapse of SVB appears to have been caused by Fed policy and the mishandling of its debt portfolio. SVB was a major bank financing high-tech projects and startups. As interest rates were raised and monetary policy tightened, debt became more expensive and less available. In this case, the prices of the bonds in which the bank invested its funds fell, which would not have been a problem if funds had been held to redeem them. However, due to the large outflow of funds from the bank, it was forced to sell its assets at unfavourable prices, leading to a huge loss and loss of liquidity. This is in contrast to Credit Suisse's problems, which had been accumulating for a long time, and the loss of liquidity was due to a gradual loss of confidence in the institution by clients.

 

Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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71.48% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71.48% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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