Credit Suisse – Post-UBS Merger Scenario Analysis in a Volatile Market

Harris Associates sold its stake in Credit Suisse on 6 March 2023. On 9 March 2023, the bank’s annual report was delayed by the SEC [Securities Exchange Commission], and there was a potential fine. On 10 March, there was the SVB [Silicon Valley Bank] blow-up and the US regional banking pressures, and then a top shareholder ruled out further assistance on 15 March 2023. The SNB [Swiss National Bank] extended a lifeline on 16 March, and by 19 March the UBS deal was pushed through. In some of the reports on Sunday 19 March, regulators were saying liquidity outflows and market volatility showed it was really no longer possible to restore market confidence in Credit Suisse. I think UBS has agreed to pay CHF 0.76 per share, valuing it around CHF 3bn. Obviously, there were lower offers earlier in the weekend and they didn’t quite materialise. How do you expect this dynamic to play out going forwards?

Why did the Swiss National Bank step in? I think customers withdrew CHF 111bn in Q4 2022, and outflows from Credit Suisse were topping CHF 10bn per day last week, the FT [Financial Times] reported, but the bank’s CET1 ratios were still stable and its LCRs [liquidity coverage ratios] were still stable. Do those ratios mean anything now? As banks have outflows, they’re meant to be able to use those ratios as buffers. It seems now that you have to hold a buffer on top of the buffer to prevent withdrawals, and even then, if you signal you’re using that buffer, it causes a further crisis of confidence. What are your thoughts on that?

What I find interesting is that for Swiss authorities to act as quickly as they did, they must have felt there was a large feel of risk or contagion coming to the market. What potentially is on the Credit Suisse balance sheet? What’s on the bank’s non-core products group?

To what extent do you think the UBS-Credit Suisse merger was self-perpetuating? If different actions had been taken in earlier weeks, for example, the SNB stepping in early last week or a few weeks ago when the SVB news flow was starting to appear, would the bank have been able to restore confidence? This wasn’t really a liquidity issue until it started having these huge outflows, and even then it had stable CET1 ratios. Has this crisis become self-perpetuating?

Do you think UBS Chairman Colm Kelleher and CEO Ralph Hamers know what they’re getting into with Credit Suisse? Can you see the merger causing more issues than solutions?

As markets opened, UBS’s share price declined 10% and Credit Suisse is now down around 60%. Interestingly, though, UBS is now up as bonds are swinging, and its CDSs [credit default swaps] have increased over 100bps. There was talk on Sunday evening that UBS wanted a backstop of sorts, demanding that if there was material adverse change, it would pull out. Apparently, that clause was supposed to apply to if the CDS widened by over 100bps, which has now occurred. If that clause had been pushed through on the deal, the deal would now supposedly be void. What are your thoughts there?

On the point around the CHF 9bn that the Swiss government is on the hook for, that only gets called in once UBS has gone through CHF 5bn of its own capital? Is that correct?

Do you think it’s a tangible possibility that taxpayers could be on the hook for paying more?

As we all know, the Swiss like their privacy. On the analyst call last night conducted by UBS, the company mentioned that it didn’t actually plan to use the SNB CHF 100bn liquidity line, but it’s more there to send a strong message and market signal of national authority support. Do you think that’s enough? Can you envisage UBS needing to rely on it in the near future?

The transaction is going through for circa CHF 3bn. I think there were reports a couple of months ago that that the Swiss bank could be worth up to CHF 9bn on its own. How has UBS achieved such a discount?

Do you think shareholders will be happy on either side? I can’t imagine the Saudi Arabian or Qatari investors who had been supporting Credit Suisse recently with USD 1bn programmes will be very happy.

UBS shareholders now aren’t going to have any share buybacks, and there’s even an argument as to whether the company should be paying dividends if it’s receiving some form of government support. What are your thoughts on that?

Another dynamic at play is the sheer size of UBS’s balance sheet pro forma – I think it’s AUM CHF 5tn. That’s 6x Swiss GDP. Who has more power now, the Swiss government or UBS?

To unpack Credit Suisse’s investment banking arm, how much of a challenge is it going to be running it down? On the analyst call, UBS didn’t confirm or deny that a disposal could still happen around Credit Suisse First Boston CEO Michael Klein in some way, shape or form, but wouldn’t shed any colour on it. All the company was prepared to say is the investment bank would not make up more than 25% of RWA [risk-weighted assets].

I’ve seen reports that BlackRock relies heavily on Credit Suisse for trade execution and derivates, and there were obviously news flow rumours on Sunday that BlackRock was going to make some kind of counteroffer to UBS. Would you lay credence to the idea of BlackRock purchasing the investment banking arm and taking some of those execution services in-house?

Would Credit Suisse Wealth Management clients want to go to BlackRock if there were a change in jurisdiction, and thus privacy laws?

Do you have a view on the relative strengths and weaknesses of UBS and Credit Suisse’s investment banking divisions?

What do you think of UBS having to convert Credit Suisse’s accounting from US GAAP [generally accepted accounting principles] to IFRS [International Financial Reporting Standards]? Is that going to throw up tangible issues?

UBS only had a matter of hours to complete its due diligence. On the company’s calls, it said it has tried to be as conservative as possible. It’s taken estimates on closing litigations and it thinks it has provisioned enough to absorb any as and when they occur. It’s also going to try and actively settle them within that, but there could be new ones that arise against UBS and Credit Suisse for not having shareholder votes on the merger, for AT1s [additional tier 1s] being zeroed. How damaging could these be?

UBS stated that it doesn’t expect to be earnings-per-share accretive until 2027, and a big portion of that is because the company had to run down the non-core group, which has all of these legacy positions. Some of these positions are very long-dated and very illiquid, as it’s highlighted already, but it said it wants to be aggressive in this run-down. Do you think it’s potentially achievable to execute this run-down time frame faster than UBS is anticipating? The other dynamic to be aware of within that is that it’s not 100% of all the non-core assets that are going to have be grouped together. The company thinks there could still be risk of more entering its due diligence. What are your thoughts there?

Who do you think would be the marginal buyer for non-core assets in the market?

Thinking about the wealth management and asset management synergies, these two businesses are probably the most aligned, and UBS was quite upbeat on getting to acquire a lot of exposure in Southeast Asia, in which Credit Suisse supposedly has a competitive advantage. How do you expect these kinds of interactions across geographies to evolve between the two businesses?

Which synergies do you think will be easiest to realise?

On the cost-reduction side, UBS said that its announced CHF 8bn of cost-reduction savings through the Credit Suisse merger by 2027 is on top of the already-announced CHF 8bn by Credit Suisse. That’s going to be a combined total of CHF 16bn in savings, and UBS thinks CHF 6bn will come from staff cost savings, and CHF 2bn from IT. How many staff are at risk in this merger? Credit Suisse already said that it’s going to trim 9,000 staff. It only has 55,000 employees worldwide. Is it going to be multiples of that?

Going back to wealth management, do you think the merger announcement will have staved outflows?

Do you anticipate that the combined Credit Suisse-UBS private banking or retail asset-focused division is going to have to shed some assets on the deal closure, despite the headlines of a waiver? There are huge antitrust concerns there.

What do you think UBS would like to do with Allfunds or Credit Suisse’s Allfunds exposure?

What do you expect to happen around the AT1 impact? USD 16bn worth of debt has been zeroed and marked as worthless. The AT1 market is worth USD 275bn. There’s been kind of a rout in AT1s, and Finma [Swiss Financial Market Supervisory Authority] has made the decision that this is its burden. European regulators are saying, “No, we would zero equity before AT1s,” and I think Bank of England has sided more with the Swiss and said that it would zero AT1s before equity in some cases. What are your thoughts there?

Something else that I think is quite tenuous is the standard threshold for an AT1 to be converted into something, or not be used and zeroed, is if the CET1 falls below 7%. Credit Suisse’s CET1 was 14.1%. Is there risk of litigation here?

To put the AT1s in perspective, Credit Suisse’s bond prospectus says, “You can lose money. Usually, stockholders get hit worse that the debt holders. The impact of this will not be really clear.” The regulator has almost inverted capital structure seniority, so while the maturity structure for paper will determine when the cost of capital will rise, I feel most banks are going to be saying, with an inevitable slight sell-off in AT1 paper and wider credit default swaps, “Our cost of capital has increased quite substantially.” This will lead to a tightening in general economic credit conditions. What are your thoughts on that?

On UBS’s analyst call, the company could not rule out that tier 2 cocos [contingent convertibles] – and these are telcos and opcos – would not have similar write-downs and be zeroed. Potentially, this USD 13bn figure could grow. Do you agree with that?

On the staff damage, do you think Credit Suisse staff are going to want to merge with UBS staff? They used to be almost bitter rivals.

Do you think it’s going to be possible for UBS to retain key Credit Suisse talent?

Although Credit Suisse has said staff bonuses and compensation packages will still be paid out, these will obviously be paid out in a different way and valued differently. I don’t think there’s that much clarity on how those incentive plans will be priced at UBS yet. What’s your take on that?

What implications do you think the UBS merger has on the future of the wealth management industry?

What are your thoughts on concentration risk? Will others be able to compete with the scale? UBS should have access to a very good cost of funds.

Do you think there are further implications that markets aren’t discussing in terms of the new wealth management industry that we’re going to see?

What is the higher-rate impact on banks? They’ve been enjoying a huge net interest income boost and then there wasn’t really any pressure to pass on deposit betas. Do you think there’s enough pressure now on the Federal Reserve to stop hiking for a bit, or should they continue with the risk of letting inflation run?

Another dynamic is that there’s been a flood of money into money markets. That’s obviously coming from outflows from some of the banks’ wealth management and private banking divisions. Do you think this has created even more stress?

What do you think is the risk to neobanks such as Monzo, who haven’t quite achieved profitability yet? Is that going to lead depositors to question where they’re holding their money?

If you were to leave investor clients with three key things that you’ll be watching for around Credit Suisse and why, what would those be?

Do you see the Credit Suisse integration working in the long term on UBS’s 2027 timeline?