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Ubs’s Acquisition of Credit Suisse Raises Concerns of Backlash at Home

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UBS’s acquisition of Credit Suisse is proving to be a lucrative move, but it may come at a cost. UBS CEO Sergio Ermotti intends to keep Credit Suisse’s domestic business and aims to implement more aggressive cost-cutting measures than his predecessor. While this strategy bodes well for UBS and its shareholders, it also raises concerns of a potential backlash in Switzerland.

Ahead of UBS’s delayed second-quarter results, shareholders had three key questions. First, would Ermotti surpass the previous cost-cutting target of $8 billion set by Ralph Hamers? Second, how many clients had withdrawn funds or stopped dealing with the bank due to concerns over exposure to a single counterparty? And finally, what would happen to Credit Suisse’s local business under UBS’s ownership?

Fortunately for shareholders, Ermotti had positive news on all fronts. He plans to retain Credit Suisse’s Swiss business, allowing UBS to establish a dominant position in its home market and achieve significant cost savings. Additionally, UBS’s core global wealth business performed exceptionally well, attracting $16 billion in new client money in the second quarter, the best performance in over a decade.

While certain businesses within Credit Suisse are facing challenges, Ermotti is not particularly concerned. Excluding exceptional items, the acquired bank’s revenue dropped by $1.2 billion between the first and second quarters. Extrapolating this decline over a year suggests an annual revenue decrease of $4.7 billion. However, this is overshadowed by the potential for over $10 billion in cost reductions. Notably, the largest revenue decline occurred in Credit Suisse’s investment bank, which aligns with Ermotti’s plan to downsize this division. Furthermore, there has been a halt in client withdrawals from Credit Suisse’s wealth business.

The main risk lies in how this positive news is received in Switzerland. UBS reported earnings of $29 billion in the second quarter, resulting in a remarkable 178% return on tangible equity. However, this is largely due to accounting factors, as UBS acquired the bank for less than $4 billion despite its equity exceeding $30 billion. Nevertheless, this figure may stick in the minds of Swiss politicians. Additionally, Ermotti’s announcement of 3,000 job cuts in the country may further fuel concerns among legislators and regulators. Some politicians have even proposed imposing limits on UBS’s balance sheet, and the Swiss Competition Commission is currently examining the deal.

Despite these potential challenges, UBS’s share price rose by 5% following the announcement, and it has increased by over a third since the takeover was agreed upon in March. However, Ermotti must be cautious as success with shareholders could attract unwanted political attention.

In related news, UBS has confirmed its intention to retain Credit Suisse’s domestic business, known as Credit Suisse (Schweiz). UBS believes that this legal entity would struggle as a standalone bank due to a funding shortfall. As part of the wider deal, CEO Sergio Ermotti plans to cut costs by at least $10 billion by 2026, surpassing the previous target set by his predecessor. Additionally, UBS aims to offload $55 billion of risk-weighted assets from the combined group, including $29 billion of assets that Credit Suisse had already decided to discard before the emergency rescue.

More detail via Reuters here… ( Image via Reuters )

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