As it gets ready to finalise the saving of its troubled Swiss rival, UBS (UBSG.S) has highlighted tens or billions of dollars in possible expenses – and gains – from its buyout of Credit Suisse (CSGN.S). This highlights the enormous stakes involved.
UBS projected in a regulatory offer that fair value modifications to the merged group’s financial holdings and obligations would have a negative effect of $13 billion, and that further potential legal and regulatory costs resulting from outflows would have a negative impact of $4 billion.
It also included a list of additional elements, such as a change in accounting principles, that would increase the overall loss to $28.3 billion.
But that might likely be offset at $17.1 billion in losses due to the AT1 bonds held by Credit Suisse and similar things.
In addition, UBS predicted that by acquiring Credit Suisse for a small portion of its book value, it would record a one-time gain of $34.8 billion due to the so-called adverse goodwill.
If UBS completes the purchase as expected next month, the financial buffer will assist absorb potential losses and possibly increase the lender’s 2Q profit.
Although the deal’s financial ramifications were widely looked forward at—UBS shares were largely unchanged on Wednesday—the size of the revisions is just another indication of Credit Suisse’s fragility and the difficulties UBS would confront in integrating the firm.
UBS said the predictions were provisional and the figures could significantly alter in its initial look at how the combined business will look. Additionally, it hinted that it would record rearrangement provisions beyond that but provided no figures.
According to a report by Vontobel analyst and expert Andreas Venditti, costs associated with restructuring the bank would likely be incurred when the deal complete. According to UBS’ recent statements, personnel reductions will be the main source of savings.
While the acquisition is ongoing, UBS has imposed a number of limitations on Credit Suisse, including caps on the amount that may be borrowed, the amount that can be spent, and the size of some contracts that can be signed.
Benjamin Quinlan, present chief executive for Hong Kong-located financial consulting firm Quinlan & Associates, Credit Suisse clearly ran into problems as a result of weaknesses in its risk management, so simply imposing these restrictions on the capacity or requirements to lend is not overly outrageous.
In the end, according to UBS, they will have to record these risks on their backs.
After UBS revealed recently that Credit Suisse has already stopped asset inflows, Quinlan stated that the limits might lead some clients to depart Credit Suisse but might not speed up the rate of outflows currently being observed.
In light of the emergency situation and the fact that Credit Suisse’s money situation quickly deteriorated after it had already experienced a challenging year, UBS said it was pushed into the purchase and had lesser than mere four days to fully complete their due diligence.
Under the terms of the rescue agreement negotiated by Swiss regulators over a weekend in about March amid turbulence in the world’s banking system, UBS agreed to acquire Credit Suisse for about 3 billion Swiss francs (around $3.4 billion) in stock and to take on up to the ceiling of 5 billion francs in damages from the business’s planned winding down.
A wealth manager with above $5 trillion in invested funds and further than 120,000 workers worldwide will be created as a result of the first global bank saving since the well-known 2008 financial landmine which is aided by up to around 250 billion Swiss francs in the public funding.
UBS warned that the 167-years-old Credit Suisse’s problems would not go away and predicted that its former rival would post sizable pretax losses for both the 2Q and the entire year.
UBS Group AG intends to manage two distinct parent businesses — UBS AG & Credit Suisse AG — after the legal conclusion of the merger, UBS stated last week. The integration procedure, according to this, might take uptown three to four years.