Analysis: UBS begins tricky task of integrating Credit Suisse
UBS announced its results for the first quarter today, reporting that its profit more than halved compared to last year thanks to legacy issues dating back to the financial crisis.
But, somewhat unsurprisingly, analysts and investors were far more concerned with how the bank will manage the integration of its long-time rival Credit Suisse.
There were few concrete updates on the transaction, although UBS said it expects the transaction to close in the second quarter, and plans to report combined financial statements, risk-weighted assets and Common Equity Tier 1 ratio at the next set of results.
UBS chief executive Sergio Ermotti repeatedly stressed to analysts that the deal will provide value “despite its complexity”.
“The acquisition enables us to benefit from the significant franchise value and in many cases complementary businesses within Credit Suisse,” he said.
Of particular interest is the opportunities from Credit Suisse’s wealth management business. Ermotti suggested the deal would reinforce UBS’s position as “the only truly global player” among wealth managers.
Operating profit fell seven per cent in the UBS’s wealth management division to $1.2bn but analysts at JP Morgan said today that the unit “remains a strong performer, with the franchise well intact as reflected in inflows of six per cent annualised.”
Credit Suisse has a strong franchise value in north Asia while UBS is stronger in the southeast, Ermotti said. Bringing the two together is “very complementary.” Elsewhere Ermotti said the acquisition will “significantly enhance” UBS’s position in Latin America.
In Switzerland, Ermotti said Credit Suisse’s strong franchise with large corporations is “complementary to our own”, while he outlined his plan to “capture” many SMEs, arguing many don’t have the same relationship with larger banks as they do with regional banks.
Credit Suisse’s results yesterday, however, revealed the scale of the challenge. It reported a CHF61.2bn of outflows in the quarter and forecast a substantial loss for the full year.
While there certainly are opportunities for UBS’s wealth management business, these will only survive if clients stay at the bank and some have raised concerns that clients will spread their funds across more banks.
“Wealth client attrition risk from the UBS-Credit Suisse combination remains a key deal risk… UBS’ $28bn of wealth inflows, including $7bn in late March, signal some gains during the turmoil by UBS – but also by competitors,” Bloomberg Intelligence’s Alison Wiliams said.
However, Ermotti insisted he was “convinced that a lot of the clients will see the value added of the combined businesses and some of those flows will revert.”
UBS sees fewer opportunities in Credit Suisse’s investment bank and executives have signalled their intentions to significantly downsize the division, which caused many of Credit Suisse’s scandals.
Williams noted both banks underperformed when compared to their US competitors.
What is clear is that UBS will have its work cut out over the following months and years to create a successful combined entity.
“There is much to do and there will be difficult decisions to be made over the coming months,” Ermotti said. “Transformations don’t happen in a straight line. We know that from our own experience.”