Swiss regulators recently pre-approved global investment bank UBS’ acquisition of embattled competitor Credit Suisse for an estimated AU$4.8 billion.
As part of the “all-share” transaction, Credit Suisse shareholders have been offered one UBS share for every 22.48 Credit Suisse shares, representing approximately CHF 0.76 (AU$1.22) per share.
Together, the businesses are tipped to manage over AU$5 trillion in invested assets across global markets, of which, approximately AU$2.2 trillion would be invested in Europe.
The combined business is projected to generate annual run-rate of cost reductions exceeding AU$11.9 billion by 2027.
According to investment research group Morningstar, UBS is well equipped to “extract value” from the acquisition following a “radical” overhaul of Credit Suisse’s operations.
“We calculate that the UBS’ 2027 cost savings target would reduce Credit Suisse’s 2022 adjusted operating expenses by around 60 per cent,” Morningstar equity analyst Johann Scholtz said.
“The restructuring will come with material costs, but UBS is better placed than Credit Suisse to absorb this.
“The challenge for UBS will be to keep revenue attrition to a minimum during the restructuring period.”
The deal has been described by UBS as an “emergency rescue”, with Credit Suisse acknowledging the necessity of the takeover.
“Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” Axel P Lehmann, chairman of the board of directors of Credit Suisse, said.
“This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.”
But Andrew Haslip, wealth management analyst at GlobalData, fears the deal would erode competition in the sector.
“While the deal is troubling for several reasons, in terms of the private wealth management space it creates a superpower that could dominate the industry,” he said.
Mr Haslip said the merger would take the combined entity’s total assets under management (AUM) to just under $4 trillion as of the end of 2022, reportedly representing 6.2 per cent of the high-net-worth market.
“While on paper this move looks like a fairly neat solution with minimal government intervention, it is likely to cause significant competitive issues,” he continued.
He noted the combined entity’s nearest rivals Morgan Stanley and Bank of America, reported global AUM of $1.7 trillion and $1.4 trillion, respectively, as at the close of 2022.
Their combined AUM, he added, would total just 78 per cent of UBS and Credit Suisse’s portfolio.
Meanwhile, Julius Baer — the closest Swiss banking competitor — ended the 2022 calendar year with a total AUM of $458.6 billion.
“These are all impressively large client portfolios but are vastly dwarfed by the combined UBS/Credit Suisse,” Haslip said.
“In the US, where Credit Suisse has no onshore wealth management presence, Bank of America, Morgan Stanley, and other leading local private banks are sizable enough to challenge the combined entity.
“Yet outside of the US, the disparity in size is glaring, and within the Swiss market competitive issues are unavoidable.”
According to Haslip, regulators would need to address competitive imbalances over the longer-term.
The UBS acquisition followed mounting concerns over Credit Suisse’s balance sheet strength, which was undermined by “significantly higher withdrawals” of cash deposits and non-renewal of maturing time deposits over the fourth quarter of 2022.
These outflows “substantially exceeded” the rates experienced in the previous quarter, up from AU$21 billion to AU$180 billion.
Investor sentiment later worsened off the back of three banking collapses in the United States, attributed to poor capital management exposed by aggressive monetary policy tightening.
