DON´T SAY IT TOO LOUDLY, BUT UBS JUST GOT A STEAL OF A DEAL / THE WALL STREET JOURNAL

Don’t Say It Too Loudly, But UBS Just Got a Steal of a Deal

The political whirlwind the acquisition of Credit Suisse has stirred in Switzerland gives the country’s largest bank reasons to lowball its financial estimates

By Jon Sindreu

UBS has completed the purchase of Credit Suisse.

In the long tradition of Swiss banking secrecy, the better the deal UBS has gotten for Credit Suisse, the less investors may hear about it.

UBS said Monday that it had completed the acquisition of its biggest rival. 

When Swiss regulators brokered the merger back in March, they assuaged fears around financial stability, but investors haven’t warmed to the deal itself: Shares in UBS have fared worse than those of other European lenders this year, reversing a pattern of outperformance since 2020 that was driven by a higher return on equity and generous cash distributions.

The same UBS investors who previously enjoyed concrete financial gains are now being forced to open a black box they never asked for, which is sure to reduce stock buybacks.

It isn’t just that many of Credit Suisse’s assets will need to be written down. 

There are restructuring expenses, difficulties around the winding down of its probably worthless investment bank and, even harder to predict, a mountain of litigation that could come UBS’s way. 

It has inherited the legal liability associated with the $17 billion in Credit Suisse convertible bonds that Swiss officials decided to wipe out. 

Given the bank’s scandal-ridden recent history, unforeseen legal problems also could lurk beneath the surface.

Last month, UBS sent a registration document to the Securities and Exchange Commission with high-level theoretical accounts for the combined entity based on estimated costs of dealing with all these problems. 

The estimates, which were confirmed on Monday, cut the tangible book value of Credit Suisse from $65 billion to $38 billion. 

The deal math suggests that UBS’s own tangible book value per share will increase 58%, whereas executives back in March said it would rise 74%.

Still, the absence of nasty surprises as UBS has worked to complete the deal matters more than the precise numbers, which were always going to move. 

Many of last month’s additional estimated costs, such as those related to pension plans, won’t affect UBS’s key capital ratio. 

The bank said Monday that this is expected to hover at around 14% throughout the year—in the upper range of what could be expected and similar to UBS’s previous figure. 

There are also hints of conservatism in the way UBS is modeling the deal’s impact. 

The biggest markdown is a $5.9 billion fair-value adjustment to loans and advances, around half of which is for mortgages that are likely to end up accruing back to par. 

When it comes to litigation, the bank has earmarked a hefty $4 billion.

The reality is that UBS has no interest in playing up the numbers, given the political whirlwind the megabank merger has stirred up in Switzerland. 

Lawmakers rebuked the deal and have launched a parliamentary inquiry.

Of course, its assessment of the financial impact is still guesswork, mostly derived from end-2022 data. 

UBS only gets to properly rummage through Credit Suisse’s books now that it has completed the deal. Size advantages are hard to quantify. 

UBS will become the world’s second-largest wealth manager with $3.4 trillion under supervision, but rich clients value diversification and could take some business elsewhere. 

Political outrage may make it difficult for UBS to cut costs by laying off Swiss employees.

For investors, however, this deal isn’t above all about synergies or strategic rationale. 

It is about UBS getting $38 billion in estimated tangible value for a paltry $3.6 billion, using Monday’s market prices. 

Not to mention that, in normal times, such a merger would have come with antitrust issues instead of a government guarantee: UBS confirmed Friday that, after the first 5 billion Swiss francs ($5.5 billion) in losses on Credit Suisse’s portfolio of noncore assets, the public sector will cover the next 9 billion francs.

Given a global economic slowdown, ineffective financial regulation and a mania for artificial intelligence, investors were never going to get excited about bank stocks. 

Longer-term, though, UBS may be one of very few that comes with a free lunch, courtesy of Credit Suisse. 

Just don’t say it too loudly.