The merger of UBS and Credit Suisse has created a financial services powerhouse. On Monday, UBS (UBSG.S) announced that its emergency acquisition of troubled local rival Credit Suisse (CSGN.S) had been completed, establishing a massive Swiss bank with a balance sheet of $1.6 trillion and stronger strength in wealth management.
UBS CEO Sergio Ermotti and Chairman Colm Kelleher announced the largest banking merger since the 2008 global financial crisis, stating that it would provide challenges but also “many opportunities” for clients, workers, shareholders, and Switzerland.
UBS will gain a dominant position in important markets where it would have taken years to expand without the firm managing $5 trillion in assets. Credit Suisse’s 167-year history, which has been plagued by scandals and losses in recent years, comes to an end with the merger.
Credit Suisse, dogged by scandals and severe losses since its 2007 zenith at more than 82 Swiss francs ($90.14), closed at less than one franc on Monday.
On the last day of trading, Credit Suisse shares gained nearly 1%, while UBS shares gained roughly 0.8%.
There are a total of 120,000 people working for the two banks around the world, though UBS has already announced it will be laying off workers to save money and take advantage of synergies.
Credit Suisse AG is now a wholly owned subsidiary of UBS and will be operated independently of the parent company.
According to a UBS spokeswoman, more than a quarter of the more than 160 leaders being confirmed or hired today are coming to UBS from Credit Suisse.
Credit Suisse’s domestic business leader, Andre Helfenstein, will continue in his current position. UBS has stated that it is evaluating all potential long-term strategies for the division.
Rushing to close
Swiss regulators arranged a bailout on March 19 in which UBS agreed to buy the institution for a discount price of 3 billion Swiss francs ($3.32 billion) and up to 5 billion francs in assumed losses in order to prevent a collapse in consumer confidence driving Switzerland’s second-largest bank over the edge.
UBS finalized the terms of a public backstop of 9 billion Swiss francs ($10 billion) for losses resulting from the winding down of certain aspects of Credit Suisse’s business on Friday.
In a drive to provide greater stability for Credit Suisse clients and workers and prevent exits, UBS completed the merger in less than three months, a tight timeframe considering the scope and complexity of the deal.
State funding of the rescue operation dispelled two assumptions, namely, that Switzerland was completely predictable and that taxpayers would be spared the consequences of bank failures.
According to INSEAD professor of banking and finance Jean Dermine, “it was supposed to be the end of too-big-to-fail and state-led bailouts,” and the experience proved that this major reform following the global financial crisis had failed.
According to Arturo Bris, professor of finance and director of the IMD World Competitiveness Center, the bailout has also shown that even large multinational banks are susceptible to periods of bank panic.
Additionally, UBS’s stated intention to significantly reduce the size of Credit Suisse’s investment bank represents yet another withdrawal by a European banker from the securities trading industry, which is now largely under the control of American corporations.
Many banks have scaled back their global ambitions since the global financial crisis as a result of stricter regulations.
Swiss regulator FINMA, which faced criticism for its handling of the failure of the country’s second-largest bank, stated that reducing the risk of the former Credit Suisse investment bank was a top priority for the combined institution.
After purchasing Credit Suisse for a fraction of its so-called fair value, UBS is poised to report a big profit in its second-quarter results.
Ermotti has warned that UBS will experience “bumpy” months as it continues to absorb Credit Suisse, a process that UBS estimates will take three to five years.
UBS highlighted tens of billions of dollars in potential costs and advantages, but there was also ambiguity surrounding those numbers when they presented the first picture of the new group’s finances last month, highlighting the high stakes involved.
The Upcoming Test
Ermotti, who has been invited back to supervise the merger, may find that a politically charged decision on the future of Credit Suisse’s domestic business presents the first obstacle he faces.
Ermotti has indicated that bringing it under UBS’s wing and integrating the two banks’ highly overlapping networks may create significant savings.
But he must also consider the public’s desire to keep Credit Suisse’s domestic company distinct in name, character, and, most importantly, employees.
Analysts say UBS may need to tread cautiously to avoid being exposed to even tighter regulation and capital requirements due to its larger scale, since public fears that the new bank will be too huge have been voiced. The new bank’s balance sheet will be roughly double the size of the Swiss economy.
They also express concern that the unknown future of the merger and its potential to generate long-term wealth for shareholders could make it difficult for UBS to retain both employees and clients.