To those that don’t work in or comply with intently the fortunes of the banking sector, it’s unimaginable to neatly sum up the seismic nature of UBS’s takeover of its Swiss rival Credit Suisse.
These two are the Coca-Cola and Pepsi of the Swiss banking world, the Liverpool and Manchester United, the McDonald’s and Burger King.
Combining the pair would have been completely unthinkable even just a few weeks in the past.
It was the bitter rivalry between the 2 that, for instance, was on the centre of the espionage scandal which, 4 years in the past, in the end value Tidjane Thiam, a former Credit Suisse chief govt, his job.
The two banks watch one another like hawks and continually evaluate themselves with the opposite.
Never was this extra the case than within the wake of the worldwide monetary disaster.
UBS required a bail-out from Swiss taxpayers whereas Credit Suisse, which was supplied the identical phrases by the Swiss authorities, engineered a private-sector answer that appeared to depart it in higher form than many European lenders.
That might in flip have created a way of hubris at Credit Suisse that in the end led to the occasions of this weekend.
For it meant that when different banks started to retrench and dial down their urge for food for threat post-2008 – no extra, maybe, than UBS itself – Credit Suisse, underneath its then chief govt Brady Dougan, continued with comparatively riskier actions.
More than a decade of tripping over each banana pores and skin
In the last decade and a half that adopted the rescues of the banking disaster, Credit Suisse discovered itself tripping over each potential banana pores and skin round.
Apart from the company espionage scandal, it misplaced $5.5bn when the hedge fund Archegos Capital collapsed and racked up additional losses when the British provide chain finance enterprise Greensill Capital collapsed.
It was fined for making fraudulent loans, nicknamed ‘tuna bonds’, to the federal government of Mozambique between 2012 and 2016 and once more when Swiss courts dominated it had didn’t cease cash laundering by Bulgarian drug smugglers.
Other company mishaps included the resignation of its former chairman Sir Antonio Horta-Osorio, finest identified for his distinguished stint as Lloyds Banking Group chief govt, after he was discovered to have breached COVID protocols.
You get the image.
This is a financial institution that has stumbled from one disaster to a different previously 15 years – however the rot arguably set in instantly after the monetary disaster as a result of Credit Suisse’s administration, led by Mr Dougan, didn’t recognise that the world had modified.
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A risk-taking, buccaneering tradition
While the likes of UBS pivoted to much less dangerous actions, comparable to wealth administration, Credit Suisse largely carried on because it had earlier than.
That grew to become problematic when, obliged to put aside extra capital within the wake of the monetary disaster, Credit Suisse discovered its aggressive place eroded by bigger Wall Street giants capable of entry extra capital.
That in flip prompted Credit Suisse to take ever better dangers as its returns started to lag behind these of the Wall Street giants.
To the administration of UBS now falls the duty that eluded successive Credit Suisse chief executives – stripping away the risk-taking, buccaneering tradition on the coronary heart of the financial institution and making it altogether extra boring.
It is a process that’s more likely to contain heavy job losses within the funding banking division of Credit Suisse, which employs greater than 5,000 folks within the UK, the vast majority of them primarily based at London’s Canary Wharf.
Tantalising prospect for UBS after the short-term dangers
There are loads of dangers concerned right here for UBS.
The Swiss authorities has assured losses of as much as CHF9bn (£7.94bn) on some portfolios of belongings it’s taking over from Credit Suisse.
However, these ensures solely kick in after UBS has borne some CHF5bn (£4.41bn) of losses itself. That is why UBS shares fell by as a lot as 16% shortly after buying and selling started this morning.
What is fascinating although is that, because the day has gone on, shares of UBS have clawed again the vast majority of these losses as traders give attention to the longer-term potential advantages.
Because sure, whereas UBS is taking over quite a lot of threat and can see its earnings diluted within the quick time period, it’s in the end going to emerge with a way more highly effective place in key markets.
As fairness analysts on the funding financial institution and brokerage Jefferies International instructed shoppers this morning: “We think the objective of this transaction, while solving Credit Suisse’s situation and associated risks for the system, is to reach a win/win where UBS shareholders also get value out of this deal over time.
“The low value paid (CHF3bn) and vital security web offered to UBS (with authorities assure) are constructive, whereas UBS’s technique is unchanged.”
And that is the purpose right here.
UBS is getting a huge banking enterprise for only a fraction of its e book worth – which stood at CHF41.8bn as of the top of final 12 months – and, extra to the purpose, will enhance its market share in key areas.
For instance, the mixed pair will management 30% of the home banking market in Switzerland.
Nowhere is that this extra the case than in wealth administration – the sector which UBS has more and more handled as its precedence.
Andrew Haslip, head of wealth administration on the knowledge supplier Global Data, factors out that the mixed non-public financial institution would have had belongings underneath administration of $4trn on the finish of final 12 months – or 6.2% of the so-called excessive web value market.
He added: “While on paper this move looks like a fairly neat solution with minimal government intervention, it is likely to cause significant competitive issues.
“The mixed Swiss financial institution’s nearest non-public wealth rivals Morgan Stanley (with 2022 international belongings underneath administration of $1.7 trillion) and Bank of America (with 2022 international belongings underneath administration of $1.4trn) would solely equal 78% of its non-public wealth belongings underneath administration taken collectively.”
Julius Baer – the closest Swiss bank competitor – ended 2022 with $458.6 billion.
“These are all impressively massive consumer portfolios however are vastly dwarfed by the mixed UBS/Credit Suisse.”
In that sense, this deal has shades of the merger between Lloyds Banking Group and HBOS, engineered by the then prime minister, Gordon Brown, on the peak of the monetary disaster.
The short-term ache for shareholders of Lloyds proved immense and the financial institution ended up receiving assist from UK taxpayers.
Longer time period, nevertheless, Lloyds benefited from having the ability to take management of a rival that it could by no means have been allowed to purchase in regular instances.
The merger has left the enlarged Lloyds with near-impregnable positions of UK market management in an array of banking merchandise, together with present accounts, financial savings accounts and mortgages.
That is the tantalising prospect, long run, for these UBS shareholders presently cursing their authorities and the financial institution’s administration for denying them a vote on this significant deal.
Source: information.sky.com”