UBS Smashes Banking Record as It Absorbs Credit Suisse

UBS Group AG posted the biggest-ever quarterly profit for a bank in the second quarter as a result of its emergency takeover of Credit Suisse, and confirmed that it would fully integrate the local business of its former rival by next year.

(Bloomberg) — UBS Group AG posted the biggest-ever quarterly profit for a bank in the second quarter as a result of its emergency takeover of Credit Suisse, and confirmed that it would fully integrate the local business of its former rival by next year. 

The $29 billion gain is a result of the accounting difference between the $3.8 billion price UBS paid for Credit Suisse and the value of the acquired lender’s balance sheet. Underlying profit for the first combined UBS-Credit Suisse quarter came in at $1.1 billion. 

Almost three months since closing the deal, UBS Chief Executive Officer Sergio Ermotti is working through the implementation of one of the biggest mergers ever in global finance. The deal was hastily assembled in March as Credit Suisse hurtled toward bankruptcy after clients lost confidence in the 167-year-old institution. Ermotti confirmed that 3,000 positions will go in Switzerland alone as a result of the merger.  

Read More: UBS to Cut 3,000 Staff in Switzerland as It Integrates Rival

The integration task is likely to involve thousands more job cuts globally and comes fraught with legal risks and the potential for ballooning costs. Yet UBS now commands more than $5 trillion in client assets, with investors currently rewarding the lender with the best valuation of any major European bank.  

UBS’s shares jumped as much as 7.2% after the open in Zurich on Thursday, having gained almost 40% this year.

“This combination will reinforce our status as a premier global franchise, and one that our home market Switzerland can be proud of,” Ermotti said in the earnings release on Thursday. “We are humbled by this task, and the responsibility entrusted to us.”

Further Details

  • UBS saw net new money inflows of $16 billion in the quarter
  • Credit Suisse outflows slowed to 39 billion Swiss francs ($44.4 billion)
  • Bank sees pick-up in client activity, expects new asset inflows to continue

The accounting gain for the quarter eclipses JPMorgan Chase & Co.’s $14.3 billion profit in the first quarter of 2021, the modern record for US and European lenders. Nicolas Payen, an analyst at Kepler Cheuvreux wrote in a note that the $29 billion accounting gain was smaller than expected following Credit Suisse operating losses and an adjustment of the purchase price, but stabilization of the business was happening faster than estimated. 

UBS has now ended months of speculation over the future of Credit Suisse’s domestic unit, previously the most consistently profitable of its units. The two banks will operate separately until the planned legal merger in 2024, UBS said. The Credit Suisse brand will remain in place until clients are moved over to UBS systems, expected in 2025. Bloomberg reported the decision on full integration of Credit Suisse’s Swiss unit earlier this month. 

Read More: UBS Poised to Absorb Credit Suisse Domestic Bank, Drop Brand 

A UBS veteran who spent his first stint as CEO turning the lender into a model wealth manager after its near-failure in the financial crisis, Ermotti is keenly aware of the political sensitivities surrounding the Credit Suisse deal, which he was brought back to oversee. In a surprise move this month, UBS decided to voluntarily give up a safety net negotiated as part of the purchase, including a 9 billion-franc ($9.4 billion) government backstop. That step gives the bank more flexibility, including over the domestic franchises. 

While signaling the underlying strength of its business, UBS is now girding investors for the process of integrating its rival, to be “substantially complete” by the end of 2026. The bank is aiming for a cost-to-income ratio of less than 70% by the end of 2026. The bank said it sees underlying pre-tax profit for the group in the third quarter at around breakeven. 

What Bloomberg Intelligence Says:

UBS’ results bring two key data points signaling a successful acquisition of Credit Suisse, a stabilizing wealth unit and the decision to retain and integrate the domestic Swiss unit enabling the bank to capitalize on its increased scale and competitive leadership in its domestic market.

— Alison Williams, BI Senior Industry Analyst

It had previously guided that mark-downs on Credit Suisse assets could come in at about $13 billion and legal liabilities of as much as $4 billion over the first year of the integration. 

UBS said that the wind-down unit, which houses businesses brought over from Credit Suisse which are not compatible with its strategy, had approximately $55 billion of risk-weighted assets at the end of the quarter. Some $8 billion in positions had been exited during the quarter.

The lender said its global wealth-management business continued to see strong inflows, with the $16 billion figure billed as the highest second-quarter figure in over a decade. Flows of client funds at Credit Suisse’s wealth unit turned positive in June. The release records Credit Suisse’s final quarter as an independent company. 

“UBS clearly faces a huge task in restructuring Credit Suisse, integrating key staff, retaining clients and migrating them to its own systems, solving CS’s litigation issues, etc,” analysts at Vontobel Holding AG wrote in a note. “This will require significant time and management attention.”

–With assistance from Alessandro Speciale and Allegra Catelli.

(Updates with shares, Switzerland job cuts. An earlier version of the story was corrected to amend asset total in second paragraph.)

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