How Will Ubs Strip Back Credit Suisse's Investment Bank?

2023-06-29 02:18:59

(MENAFN- swissinfo) ubs faces a number of tricky questions as it merges with credit suisse. © keystone / ennio leanza

in the days after agreeing to rescue credit suisse, ubs executives rushed to assure investors they would not let their rival's scandal-plagued investment bank infect their own.

this content was published on june 29, 2023 june 29, 2023 swissinfo.ch/mga

with the takeover complete, ubs is now embarking on a project few have succeeded in doing before: stripping the loss-making and capital-intensive business back to its bare bones.

“if ubs proves they can crunch down credit suisse's balance sheet in a value-neutral way it could have big consequences for the banking sector as a whole,” said justin bisseker, banking analyst at fund manager schroders.

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“could the likes of barclays or deutsche be inspired to collapse their underperforming investment banks if there was no value drag?”

more than three months after the shotgun wedding was agreed, there are still few details about what ubs intends to do with credit suisse's investment bank beyond the target for the combined investment banking businesses to account for no more than 25% of risk-weighted assets.

daunting task

at the end of 2022, both ubs and credit suisse had investment banks that accounted for about 30% of group rwas. assuming credit suisse's business bears the brunt of the cuts, its rwas could drop by two-thirds.

analysts and shareholders are expecting ubs to provide more clarity when the bank reports its delayed second-quarter results on august 31. they have already begun speculating about the fate of a business that employs thousands of bankers, has hundreds of billions of dollars of leveraged exposure and was the source of so many of its crises in recent years.

the task of overseeing the wind-down has been handed to bea martin, the former ubs group treasurer, who combines her new role as head of non-core and legacy with being president of europe, middle east and africa.

while the likes of deutsche bank and royal bank of scotland have hacked back their investment banks over the past decade, ubs's task is more daunting given it is merging two businesses at the same time and also dealing with the riskier products that credit suisse offered.

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“credit suisse was more exotic and had a higher risk tolerance compared to ubs in a big way,” said a person involved in the wind-down plans.“ubs is also dealing with different systems, people and culture - which all creates added layers of complexity.”

divergent fortunes

a comparison of the two investment banks highlights the differing paths of ubs and credit suisse in recent years.

based on first-quarter results, the ubs business generated more than twice the revenues of its former competitor but with just 24% higher costs, resulting in ubs's investment bank producing a $2.1 billion profit, compared with a $1.4 billion loss at credit suisse.

since the global financial crisis, ubs has been restructuring its investment bank to service its much bigger wealth management business, focusing on areas such as equities, foreign exchange and certain underwriting and advisory services.

ubs's investment bank has accounted for 25-30% of the wider group's profits since the bank cut back its fixed-income division a decade ago.

credit suisse has belatedly tried to follow a similar strategy but its investment bank has weighed it down over the past five years with an aggregate $2.8 billion loss over the period, thanks to a litany of trading losses, regulatory fines and legal expenses.

two years ago it suffered the biggest trading loss in its 167-year history following the collapse of family office archegos capital management. the initial $5.5 billion hit is set to be exacerbated by fines, the financial times reported last week, with regulators having concluded their investigations into the case.

the business was also embroiled in a string of ill-fated deals, including its involvement in the $2 billion mozambique“tuna bonds” scandal.

14,500 job cuts

despite some attempts in recent years to de-risk and shrink the investment bank, credit suisse's main problem was that the areas it excelled at - such as high-yield and securitised products, leveraged finance and certain advisory markets - were of little interest to its wealth management clients.

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“most of this business, which was already undergoing an extensive restructuring, is likely to be radically downsized or closed,” said nicholas watts, banks analyst at redburn, the rothschild-owned research business.

he predicted that by 2027, ubs will have slashed 85% of jobs and costs from credit suisse's investment bank, meaning 14,500 bankers and $4.7 billion of expenses would go.

a person with knowledge of ubs's plans said fewer investment bankers would lose their jobs, while another added that the number of redundancies from the combined group would be about 20,000 of a total workforce of slightly more than 100,000 but cautioned that it was too early to outline final numbers.

johann scholtz, banks analyst at morningstar, expected even heavier cuts. of the $8 billion overall reduction in spending ubs has earmarked from the takeover by 2027, he predicted 70% - or $5.6 billion - would come from credit suisse's investment bank.

“reducing the size of credit suisse's capital-hungry investment banking operations will release significant capital that ubs can return to shareholders,” he added.

as part of its strategic review unveiled late last year, credit suisse set up the non-core unit - a“bad bank” to wind down exposures in unwanted businesses and release capital. ubs will use this as the basis for its own plans to reduce its former rival's investment bank.

“credit suisse used the ncu as a capital optimisation strategy - the intention was to release capital rather than eliminate business that were non-core - and they executed it very slowly,” said the person involved in the wind-down plans.

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