UBS's Bold Acquisition of Credit Suisse: A Risky Bet

UBS Group (ticker: UBS) made waves in March with its surprising acquisition of crosstown rival Credit Suisse. The deal promised significant potential, but as the dust settles, questions arise about whether UBS truly came out on top.

In its second quarter, the stalwart Swiss institution, a founding figure of Zurich's financial landscape, reported an unprecedented quarterly profit of $29 billion. Unsurprisingly, shares surged by 2.5%, yielding an impressive gain of over 40% since the acquisition was announced.

However, this massive profit does not necessarily reflect UBS's own earnings. The vast majority of this windfall came from the concept of "negative good will" associated with the Credit Suisse assets. UBS paid a mere $3 billion for these assets, which it now values at $32 billion. Contrary to initial fears from shareholders, depositors, and Swiss regulators, Credit Suisse's troubles were not insurmountable.

Nevertheless, UBS still faces the challenging task of cleaning up the mess left by Credit Suisse before the newly combined group can generate reliable profits. Johann Scholtz, an analyst covering European banks at Morningstar, emphasizes that the true artistry of management begins now.

Estimations from Andreas Venditti, head of banks research at Bank Vontobel, reveal that Credit Suisse continues to hemorrhage $2 billion each quarter. The gaping wound resides within its investment bank, where revenues plunged by 78% year-over-year in the latest results while costs remained relatively steady at 15%.

To address this imbalance, UBS CEO Sergio Ermotti plans to reduce the headcount accordingly. However, dismissing investment bankers comes at a considerable expense. UBS has set aside a whopping $10 billion for restructuring expenses.

Ermotti is seeking alternative avenues for cost-cutting by focusing on trimming parts of the investment bank that demonstrate potential, such as the thriving U.S. leveraged finance practice.

In anticipation of the onslaught of lawsuits following Credit Suisse's downfall, UBS has also allocated $4.5 billion for litigation provisions.

Fortunately, there is a glimmer of hope amid Credit Suisse's tumultuous situation. The wealth management business, which likely attracted UBS in the first place, appears to be stabilizing.

As UBS forges ahead in its efforts to harness the potential of its acquisition, only time will tell if this bold move will translate into a resounding success. The road ahead may be challenging, but UBS is poised to weather the storms and emerge as a stronger force in the global banking landscape.

UBS Rises Amidst Credit Suisse's Troubles

The division of UBS experienced significant asset outflows of around $200 billion between October and May, as both wealthy clients and relationship managers abandoned ship, according to Venditti. However, there has been a slight turnaround in flows over the past three months.

UBS, known for its accomplished management team with extensive experience in restructuring, is led by Ermotti, who successfully rescued UBS itself from dire straits when he took charge in 2011. Under his leadership, the investment banking sector was downsized while private banking was given priority. Given his previous achievements, UBS brought Ermotti out of retirement in April to repeat this success story with Credit Suisse.

Scholtz affirms the soundness of Ermotti and his team's strategy, stating that they have already demonstrated their capabilities in similar situations. However, analysts hold differing opinions about the future performance of UBS stock. Scholtz, for instance, downgraded it to three stars, which is equivalent to a "Hold" rating in Morningstar's terminology. He expresses a preference for retail-focused European banks such as Netherlands-based ING Groep (ING) or Lloyds Banking Group (LYG) in the U.K., which are benefitting from increased interest income due to rising rates.

On the other hand, Gildas Surry, a portfolio manager at Axiom Alternative Investments, is highly optimistic about UBS. He appreciates the potential synergies in Swiss banking and wealth management resulting from the acquisition, as well as Credit Suisse's conservative approach to valuing their legacy assets. Surry predicts that the new combined franchise will benefit from positive operating leverage, thus driving substantial profits.

From a public-private crisis management standpoint, the successful rescue of Credit Suisse reflects positively on UBS. Last month, UBS even waived a CHF 9 billion ($10.1 billion) loss backstop from the Swiss government. In addition, its job-loss estimates within Switzerland have been reduced from 10,000 to 3,000.

In conclusion, while the potential for the combined bank to become a profitable enterprise catering to the world's affluent clientele is uncertain, UBS is currently enjoying a relatively stable position amidst Credit Suisse's troubles.