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In contrast to its southern European neighbors, Switzerland has experienced a rainy summer. However, the sun has finally appeared, and the need for cagoules has diminished. On Friday, UBS, the Swiss wealth manager, announced its decision to no longer rely on the state’s protective umbrella to cover potential losses resulting from its rapid acquisition of struggling Credit Suisse.
UBS has terminated a $10.3 billion loss-protection agreement, as well as a public liquidity backstop of up to $114 billion. Additionally, it has repaid emergency loans.
Despite the uncertainty in the bond markets, UBS proceeded with its decision. What drove this rush? The answer may lie in politics.
This is good news for taxpayers. Regulator Finma and the Swiss National Bank promoted the merger as a “private solution,” hoping to minimize liabilities by wiping out AT1 bonds. On the other hand, the public backstop resulted in the transfer of wealth from the state to private owners, as highlighted by Pascal Böni from Tilburg University.
UBS shareholders have already enjoyed benefits totaling about $5 billion, while Credit Suisse bondholders have gained an additional $19 billion.
Despite these gains, UBS’s shares have underperformed the Stoxx Europe banks index, and its valuation has declined compared to rival Julius Baer. According to Jefferies, UBS is currently trading at 0.85 times its projected tangible book value for 2024.
However, on Friday, UBS’s stock experienced a 4% jump. By shedding state protection, the company is saving money. The estimated cost of the scheme to UBS until the end of September is $834 million, and the annual running cost after that would have been at least $41 million per year.
If UBS had relied on loss protection, these costs could have increased tenfold. Considering the billions involved in the deal, these numbers are relatively insignificant.
UBS executives, Colm Kelleher and Sergio Ermotti, clearly have political motives. No commercial bank wants government interference, especially when making adjustments to the balance sheet after a deal. Moreover, UBS wants to retain control of the politically sensitive Credit Suisse domestic bank, which has consistently generated pre-tax profits of approximately $1.7 billion annually since 2020, according to S&P Global.
This move may also suggest that UBS has thoroughly evaluated Credit Suisse’s loan portfolio and found no significant concerns.
*This note has been updated to reflect Pascal Böni’s affiliation with Tilburg University.
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