Vice Presidents: Yug Serai, Aum Raithatha, Ivan Petkov, Daniel Dutch, Gordon So
Analysts: Henry Wareing, Rhea Bhasin, Riccardo Vittorio Perego, Vraj Agrawal, Pratyush Singh, Seun Adeleye, Riyaad Uddin, Manav Sood, Sia Jain, Aanya Chowbey, Steven Brakespeare, Kostadin Iliev, Aaron Cohen, Joshua Green, Gal Gazit, Adam El Jazouli
Deal Overview
Acquirer: UBS
Acquiree: Credit Suisse
Deal size: $3.25 billion
Buy-side Advisors: Morgan Stanley, JPMorgan Chase & Co.
Sell-side Advisor: Centerview Partners
Credit Suisse's 167-year run came to a close with an all-stock acquisition of $3.25B initiated by UBS on 19 March 2023 and actively backed by Swiss regulatory authorities. The acquiree had been put in a compromising position following the collapse of Silicon Valley Bank, which sent across a shockwave of declining market confidence in banks. This was further exacerbated by an announcement by Saudi National Bank, the largest shareholder of Credit Suisse, stating that no fresh investment would be made due to regulatory reasons, sending investors into a panic. UBS will be paying SFr0.76 per share, which is at a 60% discount to the closing price of SFr1.86 on 17 March. This acquisition will make UBS one of the largest banks in the world by assets.
UBS Overview
UBS is a worldwide firm offering financial services, including the provision of investment banking, asset management, institutional advisory and wealth management services (Bloomberg UK, 2023). Previously known as the Union Bank of Switzerland, UBS operates in over 50 countries and all major international financial centres around the world (UBS, 2023). In terms of market capitalization, UBS is placed as the 4th largest bank in Europe (as of December 2022), with $59.41bn (Statista, 2023), and the 12th largest bank in Europe in 2023 based on assets with a balance sheet of €982.34bn (Insider Intelligence, 2023). In terms of financial position, the bank has received top class ratings from major credit rating agencies and has performed well during challenging market conditions. Financial year 2022 saw UBS with CET1 capital of $45.5bn, with over $105bn in total loss absorbing capacity, establishing its robust capital position. Aside from this, the firm has already surrounded itself in acquisition deals in the past, and so it is no stranger to the M&A world. For instance, it topped the advisory league tables in terms of deal count in 2020 within Switzerland with 19 deals (Mergermarket, 2022), and came 11th globally in 2021 in league tables for financial advisors (in terms of total deal value). It has essentially been a key player within many M&A deals. For instance, it advised the consortium of private equity firms ADIA, Advent, Cinven and RAG in their acquisition of Thyssenkrupp’s elevator technology business which saw a deal value of $18.7bn (Global Finance, 2021). Aside from the advisory side, the firm has been an acquirer itself. Its largest acquisition saw a deal value of $10.8bn when it merged with PaineWebber group in 2000. Hence, UBS’ experience within this field suggests it will be able to successfully acquire Credit Suisse and ensure the deal is beneficial for both firms.
Credit Suisse Overview
Credit Suisse comes in at 17th in terms of leading banks in Europe based on assets (in 2023), with a balance sheet of €729.04bn, compared to its acquirer’s 12th place position. Like UBS, the firm was founded in Switzerland, and provides worldwide financial services, including investment banking, private banking, asset management, wealth management and shared services (Credit Suisse, 2023). However, concerns over financial stability have led to the proposed merger to avoid the complete collapse of the firm as a whole. This instability has been exacerbated by a series of scandals surrounding Credit Suisse. For instance, the 2022 financial report exposed mismanagement of funds by the firm, with the fiscal year closing with its greatest loss since 2008 – at $8bn. Meanwhile, a case surrounding an ex-adviser committing fraud is rumoured to cost the firm $600m. In another case, Credit Suisse could not prevent money laundering through its own banking system, eventually being fined $2.1m and being ordered to pay $20m to the Swiss government (Forbes, 2023). All these scandals have contributed to the eventual downfall of the global firm and its financial stability.
Price of Credit Suisse Group AG shares over the last five years (Swiss Francs)
Source: Investing.com
The figure above indicates performance of Credit Suisse shares over the last 5 years (Forbes, 2023). Declining share prices are a clear indication of falling shareholder confidence in the firm's ability to keep doing business. A sharp fall in share price after the SVB debacle prompted Swiss regulators to take swift action and facilitate a deal for UBS to buy Credit Suisse in order to avoid a serious meltdown.
Events foreshadowing Credit Suisse’s downfall
Credit Suisse has been at the heart of controversy for decades prior to its fall. A "self-destructive culture" has pervaded its large-scale decisions and leadership. Former Credit Suisse CEO Oswald Grübel blames the bank’s downfall on Brady Dougan, the American head of investment banking he was replaced by in 2007 (Swissinfo, 2023). According to Grübel, investment banking was the only business prioritised by Dougan due to its lucrative financial incentives. Although those who led the firm after Dougan’s tenure spoke of great risk reform, these ideas did not materialise. Some also blame Urs Rohner, who chaired Credit Suisse from 2011 to 2021, for fueling this crisis (Swissinfo, 2023).
Credit Suisse’s track record is not promising. Its major scandals are conspicuous even pre-21st century. In 1986 the bank allegedly helped store $5-10 billion that the Philippine dictator Ferdinand Marcos stole from the country (Pegg and Makortoff, 2022). In 1999 CS was fined by Japanese authorities and their license was rescinded over a "shredding party," where bankers destroyed evidence around a search into whether CS was helping companies disguise losses (Watts and Atkinson, 1999).
Moving to the 21st century, in 2000, CS was reproached by Switzerland’s Federal Banking Commission in relation to accepting approximately $214m of funds associated with corruption in Nigeria via the military dictator Sani Abacha (Pegg and Makortoff, 2022). Amongst other money laundering scandals, in 2011 CS paid EUR 150m to settle a dispute around tax evasion in Germany (Pegg and Makortoff, 2022). In the USA, first CS was fined $536 m for side-stepping US sanctions against countries including but not limited to Iran and Sudan (The United States Department of Justice, Office of Public Affairs, 2009). In 2014 as well, CS was fined $2.6 billion for helping Americans evade taxes for several decades (Pegg and Makortoff, 2022). Although CS claimed that they "deeply regret the past misconduct that led to this settlement," it is evident that they learned very little from the incident, as in 2016 CS was forced to reach a EUR 109.5 million settlement with Italian authorities over yet another investigation on tax evasion (Pegg and Makortoff, 2022).
To continue the trend of money laundering and tax evasion scandals, in 2016 the US fined CS $16.5 million due to "significant deficiencies" in the firm’s anti-money laundering establishment (Pegg and Makortoff, 2022). In 2017, Singapore fined CS $700,000 for faltering on money laundering rules (Pegg and Makortoff, 2022). In 2017 Credit Suisse found itself in hot water regarding a European tax evasion investigation involving 55,000 accounts, and in 2018 a former CS banker, Patrice Lescaudron was put in prison for forging client signatures to divert money without their approval, leading to over $150 million in losses (Miller and Sebag, 2018). Lescaudron committed suicide in 2020 (Miller and Sebag, 2018). In a seemingly never-ending spiral, CS paid $47 million to US authorities due to a "corruption scheme" involving the offering of jobs to family and friends of Chinese officials (Pegg and Makortoff, 2022). In 2020, CS was indicted of failing to carry out proper due diligence and not investigating source of funds linked with a Bulgarian drug ring that laundered over $146 million through accounts dragging on from 2004 to 2008 (Pegg and Makortoff, 2022).
In another major and relatively recent scandal, CS Chief Executive Tidjane Thiam was forced to step down in 2020 after an investigation held the bank guilty of hiring private detectives to spy on Iqbal Kahn, CS’s former head of wealth management (Englundh, 2023). Although Credit Suisse tried to mask this as an isolated incident, it was further found that the firm planned seven spying operations between 2016 and 2019 (Englundh, 2023).
2021 – 2022 Scandals
In March 2021, Greensill Capital, a British financier specialised in corporate loans, collapsed. The insolvency was a consequence of the insurance cover it had lost on the loans given to the companies (Englundh, 2023). Credit Suisse was one of the most significantly affected firms because of the large number of Greensill’s debts it had distributed to its investors (France 24, 2023). Credit Suisse claimed that reliable insurance companies insured the credit exposure therefore the high yields had a very low risk associated with it.
However, it had relied only upon some preliminary information from Marsh & McLennan regarding the insurance cover, resulting in its investors losing billions of dollars. Credit Suisse terminated four funds that had investments aggregating to $10 billion dollars (Bergin, 2021). As of October 2022, Reuters reports that only $6.8 billion from the total losses has been funded back to the investors (Reuters, 2022).
As Credit Suisse was just about recovering from Greensill collapse, a few weeks later it lost a further $5.5 billion when the U.S family office, Archegos Capital Management, defaulted on margin calls (Englundh, 2023). It had lost on the bets it made on several technology stocks and the subsequent impact on Credit Suisse resulted in job losses and regulatory actions which damaged its reputation (BDO, 2021). The loss resulted from a fundamental failure in risk management as the bank overlooked the risks associated with great short-term profits of Archegos’ positions (Reuters, 2022).
Between 2012 and 2016, Credit Suisse extended $.3 billion loan to the People’s Republic of Mozambique for maritime surveillance, fishing, and shipyard projects (Englundh, 2023). However, a part of this loan was a bribe evident by the noticeable difference in the value of the distributed loan and the cost of the boats bought from the funding (Reuters, 2022). Credit Suisse had also arranged a loan for Mozambique which was not disclosed to the International Monetary Fund. The bribery scandal resulted in a fine of $475 million for Credit Suisse in October 2021 (France 24, 2023).
After a stream of investment losses and scandals in 2021, especially the crisis inflicted by Archegos and Greensill, a new chairman was appointed in May 2021. Antonio Horta-Osorio, former Llyod’s banking group CEO, had expertise in improving management and structure which would help Credit Suisse rebound from the failures in 2021 (Englundh, 2023). Nine months after being accused of attending the Wimbledon tennis tournament despite Switzerland’s quarantine restrictions during the pandemic, he resigned as the chairman (Jack, 2022).
In February 2022, a data leak revealed that several individuals and organisations that were involved in crimes including human rights abuses, drug trafficking, corruption and money laundering are clients of Credit Suisse. However, the bank has rejected the allegations of holding criminal money. It claims that laws and regulations relating to the accounts have changed over the years and that it can’t comment on individual accounts. The investigation of 30,000 Credit Suisse accounts with an aggregated value north of 100 billion Swiss francs accelerated the downfall of the Swiss bank (Pegg et al., 2022).
(Englundh, 2023)
2023 Scandals
Credit Suisse's reputation took another hit when it was revealed that the bank had helped wealthy clients evade taxes. The bank was fined over $2 billion and had to cut its dividend to cover the costs. However, a turbulent 2022 led to a disastrous and ultimately fatal 2023.
Source: Bloomberg
In 2023, Saudi National Bank, the bank's largest shareholder, declared it had no interest in extending its position in Credit Suisse if it was ever asked to do so, which was the spark that debuted Credit Suisse’s final crash (Uppal, 2023).
As Silicon Valley Bank and other American lenders abruptly failed in early March 2023, Credit Suisse was on the verge of collapse, sending shockwaves across the global financial industry. The shares of the Swiss corporation went down 24% intra-day before recovering by as much as 40% the following day when the institution requested 50 billion francs from the Swiss National Bank as a liquidity backup to support market confidence (Cooban, 2023). However, this confidence was short-lived, as by the 19th of March 2023, a $3.25 billion government-driven sale to UBS Group AG was announced (Keaten, 2023).
This government-backed operation has caused extreme controversy in the market as it led to the wipe-out of a huge swath of risky subordinated bonds as part of Credit Suisse’s rescue deal. The move rendered SFr16bn ($17bn) of investments worthless and prompted market regulators to distance themselves from the decision taken by Swiss authorities (Smith, 2023).
AT1 bonds are a type of hybrid security that was introduced after the 2008 financial crisis as a way for banks to raise capital and meet regulatory requirements. These bonds have features of both debt and equity and can convert into equity if the bank's capital falls below a certain threshold. The idea behind these bonds is to provide a buffer for banks during times of financial stress, but they also come with increased risks for investors, as the bonds can be written down to zero.
The collapse of Credit Suisse's AT1 bonds has led to a sell-off in the bond market and raised questions about the risks associated with these types of securities. Indeed, the regulators’ decision to preserve some value for Credit Suisse shareholders and wipe out bond holders' assets came as a brutal shock, as shareholders would nominally be subordinated to any bondholders in the capital structure.
Through these scandals it is evident that there were holes in Credit Suisse’s blueprint from long before its downfall. Whether the firm was able to predict its own downfall or not is a matter of contention, but a question that must not be ignored. Overall, the events that led to Credit Suisse's collapse highlight the importance of risk management and regulatory compliance in the banking sector. The collapse of Credit Suisse serves as a warning to other banks to maintain adequate capital buffers and to avoid risky investments that can lead to significant financial losses and a deadly loss of confidence.
Industry Analysis
Both UBS and Credit Suisse primarily operate in the investment banking sector, and therefore for the industry analysis in this report, the investment banking industry will be used.
Investment banking is a highly cyclical industry, as it primarily relies on business activity for the main source of its revenues. These revenues come in the form of dealmaking for businesses (M&A, IPOs, restructuring), and sales and trading, using the stock market as a catalyst to support their trading activities and advisory activities for institutional clients, such as hedge funds. Because of this, when there is a negative macroeconomic shock, investment banks often suffer from depressed revenues, as their dealmaking volume decreases heavily due to businesses being less willing to undergo dealmaking, and their sales and trading arm becomes far less profitable due to the value of stocks falling. The graph below supports this, as it shows how banks’ profitability and macroeconomic growth are closely correlated, supporting how investment banking is a highly cyclical industry.
Data supports this sentiment as well, as in the five biggest US banks, revenues from dealmaking and securities sales dropped by 47% (Smith, 2023) in the first nine months of 2022. This tumbling revenue has led Goldman Sachs CEO, David Solomon, to remark that “you have to assume that we have some bumpy times ahead,” (Deloitte, 2022) when discussing the investment banking industry outlook for the future.
GDP growth and Return on Assets of the banking industry for the G7 countries
Source: (Deloitte, 2022)
This idea of cyclical volatility links in closely with the current state of the investment banking industry, due to the current macroeconomic outlook being generally negative, as high inflation and interest rate hikes currently plague the economy. This impact has been seen acutely in the investment banking industry, as shown by the major job cuts which many bulge brackets are currently in the process of enacting. For example, Goldman Sachs, a premier investment bank, has laid off 3,200 (Financial Times, 2023) workers, representing 6.5% of its global workforce (as of 21/01/23). In addition to this, another investment banking powerhouse, Morgan Stanley, laid off 1,800 (Financial Times, 2023) staff in December 2022, which represents 2% of its workforce. These job cuts are particularly alarming, as Goldman Sachs and Morgan Stanley are two of the largest bulge-bracket banks in the entire industry, which illustrates how even the largest investment banks are feeling the squeeze.
Moreover, as the table below shows, this job cut trend stretches far beyond the bulge-bracket banks and is seen in all sizes of investment banks across the board, which further shows how the issues within investment banking currently are felt by many.
Source: (Smith, 2023)
However, the question that remains is whether these job cuts and the current downturn are just part of the cyclical flow of the industry, or if they represent a systemic problem which represents a force of reckoning for investment banks, similar to the 2008 financial crisis. On one hand, these problems are just cyclical, and represent a cooling off from business activity after a bumper 2021 for many, as M&A activity surged upwards in 2021 after many deals were put on hold during the Covid-19 pandemic.
This idea is the optimistic take on the current state of the industry, as it believes that, like many investment banking slumps before it, it is merely an adjustment to the business cycle. Therefore, there is little to worry about, as revenues and general outlook should improve once the global economy fully recovers from Covid-19 and the current turmoil in Ukraine.
Source: (Statista, 2023)
The graph above reinforces how the current downturn may be due to cyclical reasons, as it shows how M&A became heavily depressed in 2008 and 2020, which were the two major financial shocks in recent history. Furthermore, it explains why banks are currently undergoing job cuts, as a response to the downturn in M&A activity due to the market cooling off after a record high of M&A activity in 2021, where a record $5.9 trillion (Statista, 2023) of deals were advised on by investment banks worldwide. So therefore, by this logic, the investment banking industry has little to worry about, as current job cuts are just a result of banks slimming down after a bumper couple of years which led them to over hire in order to sustain a higher workload. James Gorman, the CEO of Morgan Stanley, supports this idea as he stated that “We’ve had a lot of growth,” and goes on to admit that “we were frankly a little overdue,” (Financial Times, 2023) in reference to the current job cuts.
The above paragraphs represent the optimistic analysis on the current state of the investment banking industry, as one with strong foundations, reliable revenue streams and generally a healthy balance sheet, that is simply suffering currently due to economic downturns hurting business activity.
However, there is a more pessimistic take as well. Silicon Valley Bank’s recent collapse provides the main evidence for the more pessimistic argument of systemic risk within the banking system, which could end the party for many investment banks in coming months. Silicon Valley Bank (SVB) is the second largest bank to fail in the US ever and is the largest bank to fail in the US since the 2008 financial crisis.
The reason for its collapse comes down to two key reasons (Turner, 2023). Firstly, SVB tied up many of their deposits in hold-to-maturity securities, such as US Government bonds and mortgage-backed securities, which left them with little liquidity to play with should they need to fund an increase in deposit outflows. Secondly, recent interest rate hikes led to these hold-to-maturity securities losing much of their value, which became a major issue when SVB’s depositors became aware of this problem and created a run on SVB, which caused it to run out of capital and fail soon after.
The further worrying sign in this story is that after SVB’s collapse, the US Treasury, the Fed, and the FDIC intervened to ensure that all of SVB’s depositors would receive all of their money back, even those with deposits that were too large to be insured (deposits above $250,000, which was 93.9% of deposits (Turner, 2023)).
While this step was necessary to ensure that many of the tech companies invested in SVB would not fail as well, this intervention creates an extremely dangerous moral hazard, as it shows that deposits are informally insured with no upper limit. In the future, this could cause more and more banks to make risky investments with their customers’ deposits, as they know that, even if they fail, the US Government will still step in and ensure that no long-term damage is done. This creation of a systemic risk in the banking system should be a huge warning sign for the future, as the similarities with this story and 2008 are too obvious to ignore.
While SVB is not an investment bank, this story should still send warning signs to the investment banking industry, due to the interconnectivity of financial firms in the industry, and the ease with which a systemic problem can spread to many different firms, which was seen in 2008. Cliff Marriott, the co-head of TMT in Europe for Goldman Sachs’ IBD described the collapse of SVB as a “Lehman moment” (Browne, 2023) for tech companies, representing the possibility that the worst could be yet to come.
This negative industry outlook ties in closely with this deal, as Credit Suisse is one of the few recent casualties in the investment banking industry and could represent what happens to an investment bank should risks not be handled in the proper way. As an ex-investment banker who worked at both UBS and Credit Suisse put it, at Credit Suisse you were told to “take advantage of the balance sheet and got paid a massive bonus,” (Financial Times, 2023) which represents the traditional sense of high risk, high reward investment banking, a key cause in 2008. Therefore, linking this back into the industry, the crux of the issue is whether or not many banks are like Credit Suisse in their high risk, high reward philosophy, or if they take a more conservative approach, learning from the lessons that 2008 handed out.
Overall, regardless of cause, the investment banking industry is currently in a precarious position, which is shown by the existence of this regulator-enacted deal. The future of the industry heavily depends on how the remainder of 2023 will play out, and if the current interest rate hikes will persist and further depress business activity and by extension, investment banking revenues.
Deal Rationale
Revenue Synergies
Expansion of wealth management business
The acquisition of Credit Suisse will accelerate UBS's strategic plans to build their wealth and asset management businesses and improve geographic diversification. On a pro forma basis, the deal will give UBS $3.4 trillion under management in the wealth management business and $1.5 trillion in their asset management business, bringing the total value under management to just under $5 trillion. This solidifies their position as one of the largest asset managers in the world and adds $1 trillion in the direction of reaching the management's aspiration of having $6 trillion under management. The deal will also help strengthen UBS's geographic diversification creating a leadership position in Switzerland, EMEA, Asia Pacific and Latin America. In Asia Pacific specifically the deal will strengthen UBS's position in South-East Asia where Credit Suisse has a leading position.
Undisputed leadership position in Switzerland
This deal will make UBS the number one franchise in corporate and personal banking in their domestic market. Post acquisition UBS will house customer deposits of 333 billion CHF and a loan portfolio of 307 billion CHF surpassing Raiffeisen on both.
Continue pursuing a focused investment banking strategy
UBS's advisory capabilities will be furthered as the acquisition will add star Credit Suisse dealmakers to their team. The UBS team has decided they will continue pursuing a focused approach to investment banking with strong operational and risk management controls and a focus on core products. UBS management plans to move all non-core positions at Credit Suisse to another unit and exit them.
Cost Synergies
The acquisition is expected to deliver $8 billion in run rate cost reductions by 2027. Management also expects the deal to turn EPS accretive after 2027 considering the dissynergies in the transaction. In the short and medium term, turnaround and integration expenses for the transaction will cause UBS return on capital employed T1 to dip below 15%. The integration of both Swiss juggernauts is expected to take three to four years excluding the non-core rundown.
Downside protection for UBS shareholders
Due to the urgent and forced nature of the deal, Swiss authorities provided CHF 9 billion in loss protection in case of losses above CHF 5 billion to UBS and a CHF 15 billion write down of AT1 instruments. The combined UBS and Credit Suisse entity will also have access to a $100 billion long term secured liquidity facility at the Swiss National Bank.
Deal Valuation
One key risk for UBS in this deal is the unquantifiable potential losses in the Credit Suisse Investment Bank, which includes both marks on trading positions as well as conduct and legal charges. UBS plans to unwind most of Credit Suisse's IB market positions while retaining the most lucrative parts of the franchise, such as the Global Banking division. However, disposing of the non-core IB assets will likely require absorbing significant multi-billion losses, especially if these are accelerated as opposed to the longer timeframe envisioned by Credit Suisse management.
The acquisition also allows UBS to keep Credit Suisse's Swiss universal banking unit, worth more than CHF 10 billion on a stand-alone basis. The value of the bank is substantially higher when combined with UBS, and UBS is now by far the dominating franchise in the lucrative Swiss market. The cost synergies are likely to be material and drive a return on equity for the combined entity significantly higher than current stand-alone units (Miller and Foerster, 2023).
Overall, Credit Suisse shareholders should retain the newly issued shares in UBS, as much value still remains and has essentially transferred over to UBS, which has the financial might and reputation to recover and monetize it. UBS, in turn, is expected to benefit greatly from the acquisition, becoming a global powerhouse in wealth and asset management while expanding its footprint in the Swiss market.
Comparable Companies (Bulge Brackets)
Comparable Companies (Yahoo Finance, 2023)
Key Ratios:
Comparable Companies’ Key Ratios (Yahoo Finance, 2023)
From this table, using end of 2022 annual reports, we can evidently see the critical state that Credit Suisse was in, through comparison to the other bulge bracket banks. UBS isn’t listed here due to them being the acquirer, although its financials would still be in a similar place to that of the group norm. Credit Suisse is the only bank with negative net income ($7.29bn USD) and they are also the lowest in book value ($50bn USD). Furthermore, looking through our key financial ratios it ranks the lowest among all of them.
Credit Suisse Key Ratios (Yahoo Finance, 2023)
The big question regarding the deal is whether Credit Suisse has been undervalued by UBS or was it justified given their critical state.
ROE Percentages (Yahoo Finance, 2023)
Firstly, our Price to Equity value for Credit Suisse was way below that of the minimum. This is partly due to the negative net income reported in FY2022, which has played a large role in the growing concerns to Credit Suisse’s stability in previous months and consequently shows that our average share value should be absolutely nothing.
However, our Price to Sales and Price to Book Ratios provide a much more reliable basis to analyse from. These figures imply that the true company value was instead around the $35bn-$37bn USD mark or $9.00 USD per share. Comparing this to the actual buyout figure of only $3.25m USD, it appears that Credit Suisse was grossly undervalued, and UBS was able to purchase it for over ten times less than it should have been able to! However, it is important to remain sceptical around these figures as they come directly from the FY2022 report. Firstly, it has no data on how Credit Suisse’s situation has evolved in the past few months, especially regarding the value of their assets which creates uncertainty over their book value and thus impact on the implied values. Alongside this, not considering what the effects of Silicon Valley Banks failure could also be another unincluded factor that would greatly reduce the value of the share. Either way however, it is clear that Credit Suisse wasn’t performing well.
Risks
Unemployment risk
When considering a merger between the two biggest banks in Switzerland, it is important to note that UBS and Credit Suisse were fierce competitors, as operations, services and products between the two financial powerhouses very much overlap; the problem is that this will lead to a risk for employees’ job security. Jobs are almost certainly going to be lost as a result of UBS’ forced acquisition, and tens of thousands of layoffs are expected, particularly in Credit Suisse’s domestic business and investment bank (FT, 2023). Colm Kelleher, the chairman of UBS and CEO of the combined bank when the deal is finalised, explained in a recent press conference that the investment banking business of his rivals would definitely be contracted in order for it to be incorporated into the “conservative risk culture” that UBS prides itself in. UBS also mentioned that they plan to reduce the combined company’s annual cost by more than 8 billion dollars by 2027, which is almost half of Credit Suisse’s expenses last year (18 billion in 2022), showing just how deep this potential cut could be. Credit Suisse were already in the middle of discussing job cuts, having planned to lay off approximately 9,000 of its 50,000 employees last October, whilst UBS boasted a much higher headcount at 74,000. The potential risk of these impending layoffs is that the banking sector are unlikely to have the capacity to absorb all of these ex-Credit Suisse bankers looking for employment, especially with other banks in the industry also conducting mass layoffs. An example can be seen in the US based Goldman Sachs, where recent mass layoffs saw 6.5% of its employees being made redundant (BBC, 2023). These unemployment effects of the merger have led to The Swiss Bank Employees Association pleading with UBS to keep the job cuts to an “absolute minimum”, whilst also prompting Credit Suisse management to set up a taskforce to manage the unemployment risk (Reuters, 2023).The Association clearly understand the devastating effect that the cuts could have not only domestically but across key locations in the ecosystem of Credit Suisse.
Reputational damage of UBS’ acquisition of Credit Suisse
Analysing from a wider perspective, it is evident that the damage of this transaction spreads further than just UBS and Credit Suisse. The Swiss and European financial sector will certainly be affected by this deal, despite it being necessary to prevent Credit Suisse collapsing and a contagion spread similar to what was seen in the 2008 global financial crisis. Switzerland was previously seen as one of the best places to bank in, renowned for its enhanced privacy and reliable financial management that it offered to investors. However, this sudden collapse of one of the most stable banking institutions in the country will surely create some concerns for customers and will result in massive reputational damage. The risk of this reputational damage is that customers may now look to utilise services overseas rather than in Switzerland and may lead to capital flowing out of Swiss banks and into other parts of the world. However, the impact of Credit Suisse’s demise has been felt in many other European banks, particularly Deutsche Bank, who saw its shares drop as far as 14% in the aftermath (The Guardian, 2023). Although it is very unlikely that Deutsche Bank will see the same fate as Silicon Valley Bank, Signature Bank and Credit Suisse, it shows just how large of an impact the reputational damage can make. The future of Swiss banking now rests in the hands of the new UBS, as it remains to be seen how they will manage to win back the trust and confidence of investors in order to maintain profits and restore the prestigious Swiss reputation.
Integration risk
A potential risk of this transaction is the execution risk of integrating Credit Suisse’s core businesses into UBS. With minimal time to orchestrate this integration, with S&P Global Ratings attributing risk to the size and weaker credit profile of Credit Suisse, in addition to the complexity and cost of winding down its investment banking operations (S&P Global, 2023). S&P Global Rating has already downgraded the credit rating of UBS from “stable” to “negative”. The integration could potentially weaken their competitiveness, causing it to miss financial targets due to restructuring and litigation costs, leading to a reduction in cost savings. Cost savings is expected to run more than $8 billion by 2027 according to UBS while the integration is anticipated to take three to four years as the CEO Ralph Hamers said. There is still uncertainty with “material execution risk”.
Bond holder opposition
European bondholders are considering legal action after the takeover led to the write down of SFr16bn of Credit Suisse’s Additional Tier 1 debt. AT1 debt is higher risk, designed to improve a bank’s capital position when it experiences financial difficulties. In addition to bondholder opposition, critics argue the pro-forma bank is too large, with deposits that can be quickly withdrawn in excess of $815bn, close to the total wealth produced in Switzerland in a year, causing severe concentration risk and having the potential to plunge the country into a debt crisis and recession should UBS fail in the future (IFR, 2023).
Conclusion
To conclude, this deal represents a pivotal point for the investment banking industry and the finance industry in general. It should serve as a cautionary tale for many that poor business practices and toxic culture can create real issues, and, in this case, even bring about complete firmwide failure. From a more positive viewpoint, this deal represents a huge opportunity for UBS, because they were able to acquire Credit Suisse at a heavy discount, and now control a high amount of assets that will allow them to become a major player in the financial industry in the years to come. From now, it will be key for UBS to merge their operations effectively with Credit Suisse’s workforce to ensure that none of the poor business practices that Credit Suisse committed continue after the acquisition. In addition, there will likely be high tensions between bankers at both firms, because they have both been such fierce competitors up to this point, as the two premier Swiss investment banks.
Overall, this deal could really make or break UBS in the future, and this fate will ultimately be determined by UBS’ ability to manage tensions, manage job cuts, and effectively integrate their far more conservative, analytical culture into the Credit Suisse bankers who remain after the deal.
References
BBC, (2023), ‘Goldman Sachs starts massive round of job cuts’. Available at: https://www.bbc.co.uk/news/business-64234129 [Accessed: 6 Apr 2023]
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Note: The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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