UBS Gears Up for Record Breaking Gain Once Credit Suisse Closes

UBS Group AG is likely to report a gain of as much as 51 billion Swiss francs ($57 billion) in its second-quarter profit related to the acquisition of rival Credit Suisse Group AG, due to close in May.

(Bloomberg) — UBS Group AG is likely to report a gain of as much as 51 billion Swiss francs ($57 billion) in its second-quarter profit related to the acquisition of rival Credit Suisse Group AG, due to close in May.

The gain —- which would catapult the Swiss lender to the biggest ever profit in banking — stems from an accounting term known as negative goodwill. That recognizes the bargain-basement price of $3 billion that UBS agreed to pay for its stricken neighbor, compared with the bank’s book value of 54 billion francs as of the end of March.

UBS on Tuesday guided that it would recognize a “material gain” from the negative goodwill generated as part of the deal, without giving a precise figure. Still, the final amount could be impacted by any restructuring charges, mark down of assets or litigation provisions this quarter. Credit Suisse said on Monday that it took a 1.3 billion franc impairment charge, mostly related to its wealth management business.

UBS agreed to take over Credit Suisse last month in an emergency sale backed by the Swiss government, amid fears that it was hurtling toward bankruptcy after a crisis of confidence in the bank’s financial strength. Analysts have pointed out that Credit Suisse’s local business, the Swiss Universal Bank, is probably worth multiple times over what UBS paid for the whole of its erstwhile biggest rival.

The takeover includes a write-down to zero of almost $17 billion of risky Credit Suisse bonds, also known as additional tier 1 capital or contingent convertible bonds, which, ironically, on Monday gave the Swiss bank a record profit in what’s likely to be its final quarter as an independent company. 

If UBS reports such a profit for the second-quarter, it would easily pass the highwater mark for modern banking history, though many investors will view it as an accounting quirk rather than a sign of strength of the underlying business. And while a gain of this magnitude may be unpopular in Switzerland, where the bank is benefiting from government support, executives have been quick to point out the risks they’re taking on in an integration that may take up to four years.

JPMorgan Chase & Co.’s $14.3 billion profit in the first quarter of 2021 is the modern record for US and European lenders. China’s biggest state-owned lender, Industrial & Commercial Bank of China Ltd., has surpassed that mark in several quarters. 

UBS may delay the publication of its second-quarter results to give itself more time to prepare statements for the combined group. The so-called badwill is expected to count towards maintaining UBS’s common equity tier 1 capital ratio, a stability metric, and to cover accounting marks and restructuring costs of combining the businesses and winding down unwanted assets. 

UBS hasn’t yet disclosed details of the integration including job cuts and restructuring costs. It plans to give details on the combined company’s financials and the size of the non-core unit it plans to wind down at second-quarter earnings, assuming a May closing, it said. Further disclosures around restructuring costs and financial targets are likely to come later in the second half of the year.

Last month, the bank brought back Sergio Ermotti as chief executive officer to oversee the takeover as the firm embarks on an extensive restructuring. Chairman Colm Kelleher has said it will take as long as four years to wrap up the merger. 

Though Credit Suisse’s book value gives UBS plenty of protection against losses, the deal with Swiss authorities bolsters that shield. The government would bear as much as 9 billion francs of losses on certain non-core assets after the first 5 billion francs of losses to be borne by UBS. 

If necessary, further loss-sharing between the Swiss government and UBS will be subject to ongoing assessment, UBS said in Tuesday’s statement.

Losses that come out of Credit Suisse acquired businesses not slotted into its wind-down unit will be a direct hit to profit, and not benefit from the established loss protections. That means UBS has an “incentive to be prudent” on how it classifies incoming assets from Credit Suisse, Ermotti told analysts on Tuesday. 

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