UBS: One of the Best Deals in History

UBS: One of the Best Deals in History

14 Nov, 2023 | Stock Insight

One of the biggest fallouts from the banking crisis earlier this year was the merger between Swiss banking giants UBS (SWX: UBSG) and Credit Suisse. Following heavy pressure from authorities worried that Credit Suisse would go under, UBS acquired its former rival for just $3.25 billion back in March. It brought the end to a proud history, with Credit Suisse’s roots dating back to 1856.
We wrote about the issues that emerged in the U.S. banking industry in March here. However, in short, the rapid rise in interest rates by central banks over the past 2 years has caused consumers and businesses to shift a lot of their deposits out of the banking system and into other investments, particularly government bonds. Thinking interest rates would stay low for a long time, many of the banks had invested these deposits in long-term bonds. When interest rates rose, the value of these bonds declined at the same time that depositors were calling on their funds–a potent recipe indeed. It began with certain higher-risk banking businesses focused on the cryptocurrency and venture capital sectors (Signature Bank and Silicon Valley Bank), before issues spread across the pond and concerns about Credit Suisse emerged.


Credit Suisse had struggled since the Global Financial Crisis. It failed to generate consistent and meaningful profits, having never generated a return on equity above 10% (which is the benchmark for an adequate ROE at a bank), and had been mired in scandal. In just some of the headlines to hit the bank over the years, Credit Suisse was fined US$2.6 billion (and pleaded guilty) for helping Americans to evade taxes for decades, it lost US$5.5 billion when U.S. family office Archegos Capital Management went into default from using highly leveraged bets, and was heavily invested with around US$10 billion in funds when Greensill Capital failed. Credit Suisse was even accused of no less than 7 separate spying scandals, including hiring private detectives to follow former head of wealth management Iqbal Kahn (who ironically had left to work for UBS).

It was no surprise then that Credit Suisse was upended when the banking industry entered a period of turmoil.


Devil in the Detail

The headline numbers from forced bank mergers often look highly appealing–whether it’s Santander buying Spanish rival Banco Popular for EUR 1 per share or JP Morgan buying investment bank Bear Stearns for US$2 per share. Yet these deals are not always as attractive as the headlines would suggest. For example, it’s widely acknowledged that JPMorganChase lost money on the Bear Stearns deal. So it’s always best to wait for the finer details to emerge, which in banking often occurs many years later–when the bank finally uncovers the extent of any loan and investment impairments, and the loss of any clients.

To date, however, the acquisition of Credit Suisse appears to be a home run for UBS.  Banking analyst Frances Coppola described the transaction as “one of the best deals in history” and that UBS had bought Credit Suisse’s assets at “a whopping discount.”


The headline numbers for UBS’ recent 2Q 2023 results look incredibly impressive. Between April and June, UBS recorded a profit of US$29.3 billion–its biggest ever quarterly result and a mammoth increase from the $2.6 billion in the previous year. The overwhelming majority of this is due to accounting for the acquisition of Credit Suisse though–the underlying profit for UBS was $2.0 billion and the legacy Credit Suisse business lost $0.8 billion for the quarter. (Unsurprisingly, a significant number of both clients and staff left Credit Suisse during the quarter but encouragingly though, UBS said that the outflows had stabilised by the end of June, and deposits had even started to grow across the franchise in 3Q 2023).

The true financial benefits of the deal are yet to be fully realised, though. Chief executive Sergio Ermotti announced that UBS has decided to fully integrate Credit Suisse’s domestic operations, rather than spinning it off as a separate entity. It made a profit last year and merging it with UBS’ operations will leave just one big domestic Swiss bank–an incredibly strong position for the company from a competition point of view. There’s also a huge opportunity in terms of cost savings. UBS is planning a total of 3,000 job cuts across the company, including 1,000 redundancies from integrating the domestic operations and another 2,000 from the remainder of the bank.

The zenith of bank employees certainly seems to have passed, with banks around the world having reduced their employee counts on a consistent basis over the past decade. Most of this has to do with the move to electronic payment processing, which has reduced the need for branch staff to process cash deposits, cheques and other in-person transactions (it has also led to less branches, which has reduced the need for overhead staff).  Some banks, such as Bank of America (NYSE: BAC), have allowed “natural attrition” (meaning that employees who leave for any reason are not replaced) to take care of most of their planned staff reductions, but mergers are an easy excuse for management to reduce costs and to axe duplicate roles and unwanted personnel.

In separate news, UBS also announced back in August that it will pay $1.4 billion to settle fraud claims from the 2008 crisis. While these kinds of settlements often bring about impressive headlines and the ire of the public (mostly with good reason, a lot of the behaviour during the global financial crisis was reprehensible), they rarely have dramatic implications for the long-term viability or profitability of a bank. Bank of America, for instance, paid an extraordinary US$100 billion or more in fines resulting from misconduct in the GFC (predominantly from other banks that it acquired, such as Countrywide Financial), and although the share price was retreated somewhat of late as bank stocks have fallen out of favour, it was approaching its pre-crisis highs back at the end of 2021.


Clear Path to Profitability

The initial benefits of the Credit Suisse acquisition are already clear. UBS’ tangible book value per share (a measure of its net assets) increased a whopping 49% to $24.6 per share during 2Q 2023. However, the real benefits will come through when the integration is finally complete. First and foremost, management has laid out a plan to reduce annual expenses by more than $10 billion by the end of 2026 (compared to the FY22 baseline). This is expected to deliver a very healthy pre-tax profit margin of 30% and a strong capital base, including a common equity tier 1 (CET1, the main regulatory measure) of 15.0% by the same 2026 timeframe.

While European banks have taken longer to return to high levels of profitability and dividends to shareholders since the GFC, UBS had generated reasonable (if not spectacular) performance on its own. The bargain basement price and cost savings opportunities on offer from the Credit Suisse deal will certainly juice these returns, and give UBS a unique opportunity in the banking world–without the high exposure to housing prices common amongst the ASX-listed banks.

Disclaimer: UBS (SWX: UBSG) is currently held in the TAMIM Portfolios.

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