UBS completes Credit Suisse takeover to become wealth management behemoth

By Noele Illien

ZURICH (Reuters) -UBS on Monday said it had completed its emergency takeover of embattled local rival Credit Suisse, creating a giant Swiss bank with a balance sheet of $1.6 trillion and greater muscle in wealth management.

Announcing the biggest banking deal since the 2008 global financial crisis UBS Chief Executive Sergio Ermotti and Chairman Colm Kelleher said it would create challenges but also “many opportunities” for clients, employees, shareholders, and Switzerland.

“This is the start of a new chapter – for UBS, which calls itself the world’s largest wealth managers, Switzerland as a financial centre and the global financial industry,” they said in an open letter published in Swiss newspapers.

They have no doubts that they will successfully handle the takeover, the letter added.

The group will oversee $5 trillion of assets giving UBS a leading position in key markets it would otherwise have needed years to grow in size and reach. The merger also brings to an end Credit Suisse’s 167-year history, marred in recent years by scandals and losses.

Credit Suisse shares were up 0.9% on their last day of trading, while UBS were up around 0.8% in early trade.

The two banks jointly employ 120,000 worldwide, although UBS has already said it will be cutting jobs to reduce costs and take advantage of synergies.

UBS agreed on March 19 to buy the lender for a knockdown price of 3 billion Swiss francs ($3.32 billion) and up to five billion francs in assumed losses in a rescue Swiss authorities orchestrated to prevent a collapse in customer confidence from pushing Switzerland’s no. 2 bank over the edge.

On Friday, UBS struck an agreement with the Swiss government on the conditions of a 9 billion Swiss franc ($10 billion) public backstop for losses from winding down parts of Credit Suisse’s business.

UBS sealed the deal in less than three months – a tight timetable given its scale and complexity – to provide greater certainty for Credit Suisse clients and employees, and stave off departures.

Both UBS and the Swiss government have offered assurances that the takeover will pay off for shareholders and will not become a burden for the taxpayer. They say the rescue was also necessary to protect Switzerland’s standing as a financial centre, which would suffer if Credit Suisse’s collapse triggered a wider banking crisis.

MYTHS DEBUNKED

However, the deal, which saw the state bankroll the rescue, exploded two myths – namely, that Switzerland was entirely predictable and safe and that banks’ problems would not rebound on the taxpayers.

“It was supposed to be the end of too-big-to-fail and state-led bailout,” said Jean Dermine, Professor of Banking and Finance at INSEAD, adding that the episode showed this central reform after the global financial crisis had not worked.

Arturo Bris, Professor of Finance and Director of the IMD World Competitiveness Center, said the rescue also the rescue showed that even big global banks were vulnerable to bouts of bank panic that could not get resolved within days.

UBS is set to book a massive profit in second-quarter results on Aug. 31 after buying Credit Suisse for a fraction of its so-called fair value.

Ermotti has, however, warned the coming months will be “bumpy” as UBS gets on with absorbing Credit Suisse, a process UBS has said will take three to five years.

Presenting the first snapshot of the new group’s finances last month, UBS underscored the high stakes involved, by flagging tens of billions of dollars of potential costs – and benefits, but also uncertainty surrounding those numbers.

Since the global financial crisis, many banks have pared back their global ambitions in response to tougher regulations.

The disappearance of Credit Suisse’s investment bank, which UBS has said it will seek to cut back significantly, marks yet another retreat of a European lender from securities trading, which is now largely dominated by U.S. firms.

NEXT CHALLENGE

Possibly the first challenge for Ermotti, brought back to steer the merger, will be a politically fraught decision about the future of Credit Suisse’s “crown jewel” – the bank’s domestic business.

Bringing it into UBS’s fold and combining the two banks’ largely overlapping networks could produce significant savings and Ermotti has indicated that as a base scenario.

But UBS has said it is considering all options as it will need to weigh that against public pressure to preserve Credit Suisse’s domestic business with its own brand, identity and, critically, workforce.

Analysts say public concerns the new bank will be too big – with a balance sheet roughly double the size of the Swiss economy – means UBS might need to tread carefully to avoid being exposed to even tougher regulation and capital requirements that its new scale would call for.

They also warn that uncertainty inevitably caused by a takeover of such scale can leave UBS struggling to retain staff and customers and that it remained an open question whether the deal can deliver value for shareholders in the long run.

($1 = 0.9030 Swiss francs)