UBS CEO Sergio Ermotti, Tuesday, May 7, 2024.
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After an intense weekend of negotiations in March 2023, the Swiss banking giant UBS agreed to buy embattled rival Credit Suisse.
Despite the attractive purchase price of $3.2 billion, investors are concerned about whether UBS will manage to turn around Credit Suisse’s investment banking business – an old source of problems. UBS has also become one of Europe’s biggest banks, raising political and regulatory fears.
At the time, investors were “very concerned” about the complexity of the deal and whether UBS would go through with it, Bruno Verstraete, founder of Lakefield Wealth Management, told CNBC via email.
“If a healthy person is sleeping next to someone with a severe flu, they are likely to contract it as well,” he said.
The acquisition was so complicated that UBS decided to change its leadership and brought back former CEO Sergio Ermotti to lead the bank to oversee the merger.
“Due to market conditions, political dynamics, and the time limit in which the deal is being made, investors are well aware of the significant risks associated with acquiring unknown responsibilities,” Verstraete said.
Now, 18 months later, that sentiment has changed, and many agree that this is the deal of the decade.
“The merger with Credit Suisse is now running on the planned milestones and timeline, and UBS leadership under CEO Sergio Ermotti is right to move forward ambitiously,” Beat Wittmann, chairman at Porta Advisors, told CNBC via email.
UBS
UBS concluded the merger of the parent company in May, then completed the transition to a US intermediary owner in June. In July, it fully merged the Swiss entity Credit Suisse and UBS. The entire process is expected to be completed by 2026.
“The integration process is being carried out in a typically Swiss way – disciplined, pragmatic, and visible on track. Calm and confidence have been restored,” said Verstraete.
Dissipating concerns were also evident when UBS reported its second quarter results in August, with analysts changing tactics to focus on the actual performance of the business, rather than the details of the merger.
UBS‘ The announcement of faster progress in cost savings also pleased investors. The bank now expects cost savings of $7 billion in 2024, or more than half of UBS’s $13 billion target for the entire merger process in 2026. These figures are compared to the 2022 baseline.
‘We have a lot of work ahead of us’
But Ermotti didn’t lift his feet.
“Let me reiterate something you have heard me say before. We still have a lot of work ahead of us to address Credit Suisse’s structural lack of sustainable profitability,” he said in August after the results.
“While we are encouraged by the significant progress we have made throughout the group, the path to restore profitability to pre-acquisition levels will not be linear,” added Ermotti.
One big overhang is potential new capital requirements from the Swiss authorities.
Swiss Minister of Finance Karin Keller-Sutter told the country’s Tages-Anzeiger newspaper earlier this year that it was “possible” that UBS would need more than $15 billion to $25 billion in capital to address national concerns that the bank had become too big to save.
Clarity on this capital increase is expected to emerge in early 2025.
So, some investors still need more convincing.
“The main indicator to watch for UBS’s fortunes is the share price, and the capital markets display a simple and clear ‘show me first’ attitude,” said Porta Advisors’ Wittmann.
UBS shares rallied after the deal in March 2023, but have remained flat ever since. They’re up more than 21% over the past 12 months, but up just 1% year-to-date.
For context, HSBC Shares are up 11% over the last year and 3% year-to-date, while Credit Agricole 19% higher over the past 12 months and up 6.5% since the start of 2023.
While the future of UBS remains uncertain, some are celebrating the development so far.
“This transaction can be recorded in history as one of the most successful deals ever made,” Verstraete said, adding that “Mr. Ermotti stands poised to become a national hero, even if this praise will come from Swiss citizens, employees, FINMA (Swiss Financial Market Supervisory Authority), or shareholders remain visible.