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UBS’s Sweet Deal For Credit Suisse Is Looking Even Sweeter

The failed bank’s assets aren’t as bad as some analysts and investors feared —and that is a big win for UBS.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

UBS Group AG has run a closer eye over the books of Credit Suisse Group AG and what it has found there is ... not bad at all.

The losses UBS will take on the failed bank’s assets when it closes the rescue takeover look to be smaller than some analysts feared. The costs mean UBS gets a $35 billion day-one profit on the deal and it will be left with a very healthy looking core capital ratio.

There are caveats, of course. Credit Suisse’s books could turn out to contain more nasties than UBS currently expects. Swiss regulators also still have to decide what extra capital UBS might need as it conducts a long and risky integration and becomes a much bigger bank. But given that the Swiss government and regulators were the ones who talked UBS into taking on its erstwhile rival, there’s a fair chance they could be more forgiving over these risks than if this had been a normal takeover.

The numbers on UBS’s first view of Credit Suisse’s books came in a filing to US regulators on Wednesday. The bank expects to close the transaction by the end of this month and will then report more detailed and reliable numbers with its second-quarter results probably later in August.

As good as the deal looks for UBS, the filing also revealed how bad it is for Credit Suisse’s bankers in terms of the payouts they will lose. UBS will save $400 million from canceled bonuses. At the same time, any unvested share awards that Credit Suisse staff keep will be converted into UBS stock at the same exchange rate as the deal is being done: one UBS share for every 22.48 Credit Suisse shares people thought they would get.

The headline here, though, is the day-one gain, which comes from the huge difference between what UBS is paying for Credit Suisse and what the accounts say it was worth even as it failed. A big chunk of that is due to Swiss regulators’ controversial decision to force Credit Suisse to write off $17 billion worth of junior bonds, which might come back to haunt both the authorities and UBS. But the gain also comes from UBS assuming lower upfront losses on Credit Suisse’s assets than some analysts had forecast.

UBS is paying roughly $3.5 billion in shares to acquire all the shareholder equity of Credit Suisse, which was worth nearly $50 billion at the end of 2022. That equity value gets cut by just $11 billion after the losses on Credit Suisse assets, provisions for litigation and other things, counterbalanced by the gain from writing off the junior bonds. Some analysts, like Andrew Coombs at Citigroup Inc. for example, had expected this purchase price adjustment to be as high as $20 billion.

UBS’s Sweet Deal For Credit Suisse Is Looking Even Sweeter

Within this, there are about $6 billion of losses on loans – mostly mortgages and lending to rich clients – and $3 billion in writedowns on trading positions. Each of these could turn out to be worse than UBS currently expects, but at the same time the bank said about half of the losses on mortgages and other loans were down to the effects of interest rates on market values. That means, if UBS holds on to them until maturity, it will make that money back.

The $3 billion losses on trading positions and another $1 billion of cuts to the value of other complex assets both relate to stuff UBS will potentially sell as it gets out of the business that Credit Suisse did that UBS wants to quit. If that’s the extent of those exit costs, it seems UBS won’t get near to triggering the 9 billion-franc ($10 billion) loss-sharing agreement it struck with the Swiss government — from disposals, at least.

Settling lawsuits related to Credit Suisse could cost billions, however, and some of that might be covered by the agreement – UBS and the government are still thrashing out the final terms. If something goes really wrong and losses exceed the loss-sharing cap, the government and UBS will negotiate some further cover. That could become important if investors in Credit Suisse’s $17 billion of junior bonds have any success in suing for compensation. UBS said in its filing that litigation over the bonds could become a significant liability.

For now, the bank is putting aside a chunky $4 billion in possible litigation costs related to Credit Suisse, which is much more than would normally be allowed. Accounting rules related to takeovers let the bank make provisions for any litigation costs it thinks are possible, whereas under day-to-day accounting rules it can only book these costs once they are close to being finalized.

UBS still has a lot of work to do and risks to face. But the first cut of its version of Credit Suisse’s books show again just what a sweet deal it was given by the government in return for saving Swiss finance.

More From Bloomberg Opinion:

  • UBS Gets Down to Selling the Swiss on Its Deal: Paul J. Davies
  • European Bank Debt Shakes Off Swiss Hangover: Marcus Ashworth
  • Swiss Bankers Forgot They're Meant to Be Boring: Matthew Brooker

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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