UBS set to benefit from Credit Suisse deal as dust settles on dramatic acquisition
Analysts were increasingly convinced that UBS’ acquisition of Credit Suisse had the potential to create long-term value for the newly merged entity.
Bank of America’s Alastair Ryan said: “The industrial logic is impeccable: Credit Suisse was the closest competitor to UBS in wealth management and Switzerland; and both banks are heavy in Swiss central costs.
“Being next door to one another, cost synergies could be substantial,” Ryan concluded.
Bloomberg Intelligence’s Alison Williams pointed out that the guardrails in the deal offered financial security to UBS.
“The significant financial protections baked into UBS’ acquisition of Credit Suisse bolster the case for long-term success, and this may increasingly gain investor focus as details continue to unfold,” she said.
In order to get the deal across the line, the Swiss authorities provided UBS with insurance in the form of a close to £8bn loss guarantee on a clearly defined part of Credit Suisse’s portfolio.
The Swiss National Bank also agreed to provide a £8.9bn liquidity line to UBS.
However, shares in UBS closed 3.7 per cent lower on Wednesday. Most other major European banks also closed in the red with the European-wide Stoxx 600 banking index down slightly.
Investors have been mulling how the deal will affect UBS’ longer-term plans.
Ratings agencies downgraded the bank’s outlook to negative as a result of the acquisition, suggesting that there might be “significant financial, cultural and franchise related integration challenges”.
To bolster investor confidence, UBS announced today that it would buy back £2.4bn worth of debt that it sold just days ago.
“The issuer has decided to launch this exercise as a result of a prudent assessment of these recent developments and the issuer’s long-term commitment to its credit investors,” UBS said, announcing the buyback.
It bought back the bonds at the price at which they were sold, rather than market prices, to compensate investors. The bonds had sunk in value following the Credit Suisse acquisition.
The news comes following reports that UBS is attempting to unwind a deal that Credit Suisse signed with Michael Klein for his boutique investment bank.
Credit Suisse agreed to buy Klein’s firm for $175m in February, but many criticised the deal, suggesting it was too favourable to Klein and might involve a conflict of interest.
Klein, who also received a $10m fee for advising on the deal, was formerly a Credit Suisse board member.
The deal was part of wider plans to spin out and list Credit Suisse’s investment banking division. The plans received a lot of criticism from Credit Suisse investors for being too complex.
UBS does not want to take on the risk from Credit Suisse’s investment banking arm which has been the source of many of the bank’s scandals.
Announcing the deal on Sunday, UBS chair Colm Kelleher said: “UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture.”