UBS announces $17 billion damage from the Credit Suisse takeover

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By Reuters

May 17, 2023 | 4:31 a.m

UBS Group AG expects a financial hit of about $17 billion from the acquisition of Credit Suisse Group AG, the bank said in a regulatory filing, as it prepares to complete the bailout of its struggling Swiss rival.

UBS estimates the negative impact of $13 billion from the fair value adjustments to the assets and liabilities of the combined group.

It also sees $4 billion in potential litigation and regulatory costs arising from the outflows.

However, UBS also estimated that it would realize a one-time gain from so-called “negative goodwill” of $34.8 billion by buying Credit Suisse for a fraction of its book value.

The financial protection will help absorb potential losses and could boost the lender’s profits in the second quarter if UBS closes the deal next month as planned.

UBS said the estimates are preliminary and the numbers may change materially at a later date.

It also said it may book restructuring provisions after that, but did not provide any figures.

“The financial information lacks an estimate of restructuring provisions as they will be booked after the deal closes,” Andreas Vendetti, an analyst at Vontobel, said in a note.

Jefferies analysts have estimated that restructuring costs, litigation rulings and a planned liquidation of the non-core unit could reach $28 billion.

Meanwhile, UBS implemented a number of restrictions on Credit Suisse during the acquisition.

In some cases, Credit Suisse cannot grant new credit facilities or a credit limit exceeding $113 million for investment-grade borrowers or more than 50 million francs for non-investment-grade borrowers, the UBS filing showed.

“Clearly, Credit Suisse has found itself in trouble because of the gaps in its risk controls, and I think simply placing these on the ability or criteria for lending is not unreasonable,” said Benjamin Quinlan, chief financial advisory officer in Hong Kong. Quinlan & Associates

“Ultimately, in UBS’s view, they will have to take these risks on their books.”

Credit Suisse also cannot incur capital expenditures of more than 10 million francs as part of restrictions or enter into certain contracts of more than 3 million francs per year.

The filing shows that Credit Suisse cannot request any “material modifications” to the terms and conditions for employees, including bonus and pension entitlements, until the deal closes.

The restrictions “will get some customers to leave Credit Suisse” but may not accelerate the pace of outflows already seen, Quinlan said, following UBS’ statement last week that Credit Suisse had already halted asset outflows.

Acceleration in the transaction

UBS said it rushed into the deal and had less than four days to complete due diligence given the “emergency circumstances” as Credit Suisse’s financial condition deteriorated.

UBS agreed in March to buy Credit Suisse for $3.4 billion in shares and assume up to 5 billion francs of losses that could result from winding up part of the business, in a shot-by-shot merger engineered by Swiss authorities over the weekend amid global banking turmoil. .

The deal, the first global bank bailout since the 2008 financial crisis, will create a wealth manager with more than $5 trillion in invested assets and more than 120,000 employees globally.

The Swiss state is backing the deal with up to 250 billion Swiss francs of public funds.

The Swiss government offers a guarantee of up to CHF9 billion for possible further losses on a clearly defined part of Credit Suisse’s portfolio.

UBS did not indicate any rapid turnaround at the 167-year-old Credit Suisse, which was brought to the brink of collapse during recent turmoil in the banking sector after years of scandals and losses.

It said it expected both Credit Suisse and its investment bank to report significant pre-tax losses in the second quarter and throughout the current year.

After the legal closing of the deal, UBS Group AG plans to run two separate parent companies – UBS AG and Credit Suisse AG, UBS said last week.

It said the merger process could take three to four years.

During that time, each organization will continue to have its own subsidiaries and subsidiaries, serve its customers and deal with counterparties.