UBS seals Credit Suisse deal to be on the road of undeterred fame

UBS (UBSG.S) announced on Monday the successful completion of its emergency acquisition of troubled local competitor Credit Suisse (CSGN.S), resulting in the formation of a massive Swiss bank with a balance sheet worth $1.6 trillion.

This landmark banking deal, the largest since the 2008 global financial crisis, is expected to present both challenges and numerous opportunities for clients, employees, shareholders, and the financial industry as a whole.

In an open letter published in Swiss newspapers, UBS Chief Executive Sergio Ermotti and Chairman Colm Kelleher expressed their belief that they would effectively manage the takeover.

With assets totalling $5 trillion under its oversight, UBS now enjoys a prominent position in key markets, which would have otherwise required years to achieve independently.

The consolidation also marks the conclusion of Credit Suisse’s 167-year legacy, which has been tarnished by scandals and economic setbacks. On the last day of trading, Credit Suisse shares observed a modest uptick of 0.9%, while UBS shares registered an approximate 0.8% increase in the early trading session.

Together, the two banks employ a global workforce of 120,000 individuals, although UBS has already announced plans to reduce costs and capitalize on synergies by cutting jobs.

In a rescue effort orchestrated by Swiss authorities to safeguard customer confidence and prevent the collapse of Switzerland’s second-largest bank, UBS agreed on March 19 to acquire Credit Suisse for a reduced price of 3 billion Swiss francs ($3.32 billion), with up to five billion francs accounting for assumed losses.

UBS and the Swiss government finalized an agreement on Friday, outlining the conditions of a 9 billion Swiss franc ($10 billion) public support package.

This financial backstop is intended to mitigate the losses associated with the gradual discontinuation of specific components of Credit Suisse’s operations.

The swift completion of the deal within a tight three-month timeline, considering its magnitude and complexity, aims to provide reassurance to Credit Suisse clients and employees, as well as prevent mass departures.

Both UBS and the Swiss government have guaranteed that the acquisition will benefit shareholders and will not impose any financial burden on taxpayers.

They argue that the rescue was essential to safeguard Switzerland’s position as a hub for financial activities, as the potential collapse of Credit Suisse had the potential to initiate a more extensive banking crisis.

Nevertheless, this deal, which involved state funding, shattered two prevailing myths: the notion that Switzerland was entirely predictable and secure, and the belief that banking problems would not adversely affect taxpayers.

Jean Dermine, a Professor of Banking and Finance at INSEAD, stated that the acquisition was expected to signal the end of the “too-big-to-fail” era and state-led bailouts.

However, the recent turn of events has demonstrated that this crucial reform following the global financial crisis was ineffective.

Arturo Bris, a Professor of Finance and Director of the IMD World Competitiveness Center, noted that the rescue highlighted the vulnerability of even major global banks to bouts of panic that cannot be resolved within a few days.

UBS anticipates a substantial profit in its second-quarter results on August 31, having acquired Credit Suisse at a fraction of its supposed fair value.

However, UBS CEO Ermotti has cautioned that the upcoming months will be challenging as the integration of Credit Suisse takes place, a process expected to span three to five years according to UBS estimates.

In its initial financial overview of the newly formed entity, UBS emphasized the high stakes involved, citing potential costs and benefits amounting to tens of billions of dollars, as well as the inherent uncertainty surrounding these figures.

In the wake of the global financial crisis, numerous banks have scaled down their international ambitions in light of more stringent regulations.

The exit of Credit Suisse from the investment banking realm, which aligns with UBS’s substantial reduction plans, exemplifies yet another occurrence of a European financial institution withdrawing from securities trading.