Swiss authorities orchestrated the widely debated emergency rescue of Credit Suisse by UBS for a sum of 3 billion Swiss francs ($3.37 billion) over one weekend in March.
UBS shares surged to their highest level in 15 years following what analysts hailed as a “historic” earnings report. However, Deutsche Bank cautioned that the Swiss banking giant may still face challenges in the future, describing it as a “construction site.”
In the second quarter, UBS reported a net profit of $28.88 billion due to negative goodwill of $28.93 billion resulting from its acquisition of troubled competitor Credit Suisse. The acquisition, facilitated by Swiss authorities, was finalized on June 12th.
Furthermore, UBS announced plans to fully integrate Credit Suisse’s Swiss banking unit, a crucial profit center, by 2024. This integration will lead to 1,000 job redundancies in addition to a previously announced reduction of 2,000 jobs as part of a comprehensive restructuring effort for the rescued bank.
By midafternoon on Thursday, UBS shares had risen by 5.6% in Zurich, reaching levels not seen since late 2008. Notably, UBS highlighted that Credit Suisse’s significant net asset and deposit outflows over the past year have started to reverse, turning positive in June. Despite the challenges posed by one of the largest mergers in banking history, UBS’ CET1 ratio, a measure of bank solvency, increased from 14.2% to 14.4% during the same period last year.
Deutsche Bank analysts Benjamin Goy and Sharath Kumar commented that although UBS remains a work in progress in the short term, the recent results and announcements should instill confidence in the long-term prospects of the bank.
Bruno Verstraete of Zurich-based Lakefield Partners also expressed optimism, describing the recent results as a “once in a blue moon, historic number.” He noted that the market now perceives the stabilization of UBS and believes that previous concerns regarding compliance and oversight issues, reminiscent of Credit Suisse’s troubled history, have been addressed.
Earlier this month, UBS terminated a 9 billion Swiss franc ($10.24 billion) loss protection agreement and a 100 billion franc public liquidity backstop provided by the Swiss government when it took over Credit Suisse in March. Verstraete suggested that this move, which severed UBS’ financial dependence on the Swiss government and central bank, enabled the bank to make the decision to absorb Credit Suisse’s domestic banking unit without political pressure. However, the prospects of further job cuts may face resistance from some segments of Swiss society.
While acknowledging the difficulty of combining positive financial results with layoff announcements, Verstraete argued that having a stable bank is in the best interest of the Swiss public, as one-third of Switzerland’s population banks with the combined UBS and Credit Suisse entity.
UBS also announced plans to wind down noncore units of Credit Suisse’s struggling investment bank, wealth management, and asset management divisions, considering them incompatible with UBS’ strategy. Analysts will closely monitor UBS’ efforts in this regard and seek further clarity on the bank’s CET1 ratio.
Gildas Surry, a senior analyst at Paris-based Axiom Alternative Investments, emphasized the significance of the positive inflow of deposits, indicating a favorable outlook for the franchise. He also highlighted the importance of UBS’ timeline for share buybacks, contingent upon the repayment of the funding line from the Swiss National Bank and UBS’ ability to access the AT1 markets following the write-downs of Credit Suisse AT1 bonds in March.
In March, the Swiss government, central bank, and UBS faced criticism for the emergency rescue package, which included the controversial write-down of 16 billion francs worth of Credit Suisse AT1 bonds.
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