UBS has indicated that its acquisition of Credit Suisse could bring significant costs and benefits, highlighting the high stakes involved as it nears the completion of the rescue of its struggling Swiss counterpart.
Based on a presentation to regulatory authorities, UBS estimated that fair value adjustments to the financial assets and liabilities of the combined group would lead to a detrimental effect of $13 billion. Additionally, it anticipated potential litigation and regulatory costs of $4 billion due to outflows.
In addition, the presentation highlighted other elements that would result in a cumulative impact of $28.3 billion, including the transition to different accounting standards.
However, these losses could be offset by various factors, including a write-down of Credit Suisse’s AT1 bonds, resulting in a gain of $17.1 billion. Furthermore, UBS estimated a one-off gain of $34.8 billion from acquiring Credit Suisse for a fraction of its book value, known as “negative goodwill.”
This financial cushion would help UBS absorb potential losses and might even boost its second-quarter profit if the transaction proceeds as planned.
While the financial implications of the deal were widely expected, UBS shares remained stable on Wednesday. Nevertheless, the magnitude of the adjustments serves as yet another indication of Credit Suisse’s vulnerability and the challenges UBS will encounter in integrating the troubled bank.
UBS emphasized that these estimates were preliminary and subject to change. It also mentioned the possibility of booking restructuring provisions, although it did not provide specific figures.
Analyst Andreas Venditti from Vontobel suggested that charges to restructure the bank would likely be recorded after the transaction closes, with cost savings mainly achieved through staff reductions, as UBS has previously stated.
During the takeover process, UBS has imposed several restrictions on Credit Suisse, including limits on lending, expenditures, and the size of certain contracts.
Financial Impact of the Credit Suisse Acquisition
Benjamin Quinlan, the CEO of financial consultancy firm Quinlan & Associates based in Hong Kong, commented that Credit Suisse faced problems due to lapses in risk controls, making it reasonable for UBS to set parameters on lending standards. Quinlan added that UBS would have to assume these risks on its books.
While the imposed restrictions may cause some clients to leave Credit Suisse, they are not expected to accelerate the outflows already experienced by the bank, as UBS stated last week that Credit Suisse had already stemmed asset outflows.
It is worth noting that UBS’s assessment of the combined group’s future outlook was a preliminary snapshot, and the actual numbers and circumstances could significantly change.
UBS revealed that it was compelled to hastily finalize the deal with Credit Suisse, having less than four days to conduct due diligence. The urgency arose from the rapid deterioration of Credit Suisse’s financial health, which had already experienced a challenging year.
Swiss authorities orchestrated the rescue agreement amid the global banking turmoil over a single March weekend.
According to the terms, UBS agreed to acquire Credit Suisse for 3 billion Swiss francs ($3.4 billion) in stock and to shoulder potential losses of up to 5 billion francs associated with winding down a portion of Credit Suisse’s business.
This rescue, the first of its kind since the 2008 financial crisis, received support from public funds of up to 250 billion Swiss francs. The merger will establish a wealth management entity with over $5 trillion in invested assets and a global workforce exceeding 120,000 employees.
UBS acknowledged that the challenges faced by Credit Suisse, a bank with a 167-year history, will persist. It anticipates substantial pretax losses from Credit Suisse in the second quarter and throughout the entire year.
Following the legal completion of the transaction, UBS Group AG announced its intention to manage two separate parent companies: UBS AG and Credit Suisse AG. This approach was disclosed by UBS last week. The integration process is projected to span three to four years.