Big bank mergers have been largely avoided in the financial sector since the 2008 financial crisis, with both industry leaders and regulators deeming them unfeasible and undesirable. However, UBS Chief Executive Sergio Ermotti might be on the verge of challenging that conventional wisdom as he contemplates the safe and profitable absorption of its local rival, Credit Suisse.
Historically, the idea of significant bank mergers has been marred by painful memories of overambitious transactions. A prime example is the ill-fated $100 billion breakup of Dutch lender ABN Amro in 2007 by Royal Bank of Scotland, Banco Santander of Spain, and Belgium’s Fortis. This deal contributed to the collapse of two consortium members the following year and left a lasting impression on bank CEOs, cautioning them against the perils of acquiring a rival. Simultaneously, regulators responded by introducing stringent rules that penalize the largest and most complex lenders, requiring them to hold even more capital in the case of mergers.
The recent turmoil involving Credit Suisse’s implosion and its subsequent rescue orchestrated by UBS challenges the entrenched skepticism surrounding significant bank mergers. Regulatory bodies, including the Swiss watchdog FINMA, observed Credit Suisse’s struggles for years as the Zurich-based lender faced one crisis after another. Its shares traded at a significant discount to book value, eroding the confidence of both investors and customers. The experience suggests that well-capitalized but unloved banks can fall out of favor swiftly. In hindsight, Swiss authorities might have preferred an earlier and more orderly merger to avert the drastic measures taken to stabilize Credit Suisse.
The lessons learned from Credit Suisse’s situation could shape the views of regulators overseeing other European lenders that are currently undervalued, such as Société Générale and Barclays. While there is no imminent threat to the stability of these institutions, the pessimistic signal from investors regarding their long-term prospects prompts consideration of a potential takeover by a more profitable rival, avoiding the pitfalls experienced by Credit Suisse.
UBS’s Sergio Ermotti is setting a promising standard for potential imitators by planning cuts equivalent to a quarter of the two banks’ combined adjusted total costs in 2022. This strategic move, if successfully implemented, could provide substantial cost savings. After accounting for one-off costs like severance payments, the net present value of these savings is estimated at $76 billion, close to UBS’s market value as of November. While UBS secured favorable terms for acquiring Credit Suisse, paying just $3.7 billion for its local rival, and regulators wiping out problematic debt securities worth $17 billion, the model created by Ermotti demonstrates the potential viability of large-scale mergers.
While a direct replication of the UBS-Credit Suisse deal might not be feasible, other European institutions, such as Société Générale and Barclays, are attractively valued. Société Générale, valued at one-third of the forecast tangible book value for 2024, could be an appealing prospect for local rival BNP Paribas or a long-term suitor like UniCredit. Similarly, Barclays, trading at two-fifths of expected book value, could attract interest from Santander, allowing for cost savings in Britain and strengthening its presence on Wall Street.
It’s important to note that these potential mergers are speculative and may not materialize. However, as the financial industry gradually distances itself from the memories of the 2008 financial crisis and observes UBS’s successful integration of Credit Suisse, the notion of significant bank mergers becomes increasingly conceivable. The industry is at a juncture where the traditional hesitations around large-scale mergers are being reevaluated, with successful models like UBS providing a roadmap for potential consolidation in the future.