Credit Suisse and UBS continue to sell aggressively after their CHF 3 billion merger. Despite the fact that the acquisition is viewed as important, the ailing Credit Suisse is fighting to regain investor trust in their firm. UBS will most likely take over Credit Suisse before the end of 2023. Experts feel that the merger will come at a big cost, and don’t forget that Credit Suisse certainly had significant withdrawals in the middle of March, eroding its revenue base. So, how does UBS gain from its acquisition of Credit Suisse?

According to the merger agreement, all Credit Suisse stockholders would get one equity share in UBS in exchange for their 22.48 shares in Credit Suisse. This exchange ratio represents a CHF 3 billion merger consideration for all Credit Suisse shares. The merged firm will be led by Colm Kelleher as Chairman and Ralph Hamers as Group CEO.

Credit Suisse shares fell over 6% on Wednesday, while UBS Group shares fell about 4%. The strong selloff in Credit Suisse last week fueled a $60 billion rout in European banks.

Talking about the merger of UBS and Credit Suisse, Johann Scholtz who is an analyst at Morningstar UK, feels that a week can be a long time duration in the financial markets. He feels that if the UBS-Credit Suisse CHF 3 billion merger transaction, announced on March 19, had occurred a week earlier, it would have seemed to be a fantastic deal. But the situation has changed!

He believes Credit Suisse had huge net withdrawals of customer assets last week, undermining its revenue base.

Scholtz, on the other hand, feels that UBS may gain value from the transaction. It is in a lot better position than Credit Suisse to carry out a major reorganization of its firm.

“We estimate that the UBS 2027 cost savings target would reduce Credit Suisse’s 2022 adjusted operating expenses by approximately 60%,” he added. Significant costs will be incurred as a result of the restructuring, although UBS is better positioned to absorb them than Credit Suisse.

The Morningstar analyst believes UBS’s biggest task will be to maintain revenue attrition to a minimal throughout the reorganization phase.

The analyst also mentioned Credit Suisse’s write-off of Additional Tier 1 Capital.

On March 19, FINMA told Credit Suisse that its Additional Tier 1 Capital of roughly CHF 16 billion will be written down to zero.

“The Swiss regulators wrote down the value of Credit Suisse CHF 16 billion additional tiers one or AT1 capital to zero, providing UBS with additional capital to absorb markdowns and restructuring charges,” Scholtz said. Furthermore, the Swiss authorities will give an additional CHF 9 billion in downside protection.”

Additionally, the analyst added that the Swiss Central Bank’s combined CHF 25 billion in downside protection and, if necessary, liquidity support should help to keep UBS wholesale funding costs under control.The termination of UBS’s share repurchase program is unfortunate, but given current market conditions, it may have happened otherwise.

In addition, Morningstar’s analyst stated that UBS appears to be planning to preserve all of Credit Suisse’s businesses except the securities trading activities, which would be phased out. UBS is seeking to exit the securities sector swiftly, but it did caution on the conference call that certain investments have very lengthy maturities. UBS said that it has received approval from Switzerland’s competition regulator to keep Credit Suisse’s Swiss banking operations. This is regarded positively!

“Credit Suisse’s Swiss bank is a high-quality franchise that, along with UBS, will have a very dominant position in the Swiss market,” he continued. UBS appears to have abandoned the Credit Suisse First Boston carve off.”

Credit Suisse shareholders will be disappointed, but Scholtz feels that “saving at least something is the best outcome under the current circumstances.” “Despite the liquidity support from the Swiss central bank and Credit Suisse’s previously sound liquidity position, its viability as a going concern was clearly under threat,” he said. The write-down of AT1 capital reveals that stockholders were lucky not to be fully wiped out. AT1 capital should, in theory, be senior to common equity.”

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