UBS can score a quick win with Swiss sale

LONDON, April 12 (Reuters Breakingviews) – Credit Suisse’s (CSGN.S) Swiss business is theoretically the jewel in the bank’s tarnished crown. But for UBS (UBSG.S) Chair Colm Kelleher, getting rid of his rival’s local unit may nonetheless be the least-bad option.
A key appeal of UBS’s state-backed emergency rescue of its struggling peer is the chance to axe expenses. Meshing Credit Suisse’s local bank – which serves retail, corporate and wealthy clients in Switzerland – with UBS’s equivalent division could generate $1.5 billion of annual savings, according to RBC analysts. Those could have a net present value of $9.5 billion, after factoring in tax and restructuring costs, according to a Breakingviews calculation.
Yet the savings could easily disappoint. Swiss clients of both UBS and Credit Suisse may decide to spread their risk by moving some business elsewhere, rather than sticking entirely with the newly created behemoth. RBC analysts reckon these so-called dis-synergies could lead to a $1.4 billion loss of revenue in Switzerland, or roughly one-third of the Credit Suisse unit’s 2022 top line.
UBS also risks inflaming opposition to the deal, which will create a giant with 29% of total Swiss deposits and may lead to job losses and branch closures in the country. Politicians, who debated the takeover in an emergency session on Tuesday, can’t block it. But after the 2008 crisis, many governments punished banks by imposing taxes and pay restrictions. Swiss solvency rules already include add-ons linked to market share, meaning UBS may in future have to fund the combined domestic business with more capital than if the two divisions were separate.
Hiving off the Credit Suisse local unit could save Kelleher and his Chief Executive Sergio Ermotti a lot of grief. It may also generate a handsome payday, which could help speed up the rest of the merger integration. The legal entity that houses much of Credit Suisse’s domestic business last year made about a 9% return on $14 billion of shareholder’s equity, according to Breakingviews calculations. That justifies a valuation of perhaps $11 billion, assuming a conservative 12% cost of equity. By contrast, UBS is paying just $3.6 billion for all of Credit Suisse, based on the buyer’s most recent share price.
The tricky part would be how to structure a deal. Kelleher could in theory just hand the Credit Suisse local division to shareholders, but that could prove destabilising if they all cash out immediately. Another option is to raise funds by listing a chunk of the shares, and sell the rest over time. It helps that most of Credit Suisse’s domestic business is already in a carved-out unit with its own capital and funding requirements.
True, a sale or listing would add one more complication to an already tricky deal. But it has to be simpler than a lengthy and politically fraught integration.
Reuters Graphics Reuters Graphics
Follow @liamwardproud on Twitter
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
Switzerland’s parliament on April 11 failed to approve the 109 billion Swiss francs ($120.5 billion) of financial guarantees used to rescue Credit Suisse in a deal with UBS last month, in a first-round vote that was largely symbolic.
The lower house retrospectively rejected the rescue at close to midnight, with heated debates continuing into the early hours of April 12. Earlier on April 11, Switzerland’s upper house had approved the rescue, meaning the two chambers of the legislative body will vote again.
The votes are, however, largely symbolic because the state committed the funds and lawmakers cannot overturn that decision.
UBS will rescue Credit Suisse in a deal worth about 3 billion Swiss francs, Swiss authorities and the two banks said on March 19.
Editing by Neil Unmack and Oliver Taslic
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.