What does Switzerland's largest bank gain by buying Credit Suisse?

Taking over Credit Suisse helped UBS make a profit of nearly 35 billion USD, own assets twice the GDP of Switzerland and eliminate competitors in the securities trading sector.

On June 12, UBS announced the completion of its takeover of rival Credit Suisse. This is the largest merger in the world banking industry since the 2008 financial crisis. The deal also creates a Swiss banking giant with assets of $1.7 trillion and 120,000 employees worldwide.

After the merger, UBS Group will operate as two separate companies, UBS and Credit Suisse. The integration of the two banks is expected to take three to four years. During this time, both banks will continue to have their own branches, working with their own clients and partners.

The Swiss financial regulator (FINMA) commented that the completion of the takeover "brings transparency and stability to both banks". This is a project of national importance for Switzerland, because the economy is heavily dependent on the financial sector.

UBS agreed in March to take over Credit Suisse for more than $3 billion, through an emergency arrangement with the Swiss government. Credit Suisse was then in a crisis of confidence and was suffering from massive withdrawals from clients. Swiss authorities feared that Credit Suisse – one of the 30 most important banks in the world – would collapse, triggering a global financial crisis.

"This is the beginning of a new chapter, both for UBS and the global financial industry," UBS CEO Sergio Ermotti and UBS Chairman Colm Kelleher said in a letter to reporters on June 12.

UBS and Credit Suisse logos on buildings in Geneva. Photo: Reuters — UBS and Credit Suisse logos on buildings in Geneva. Photo: *Reuters*

The takeover of Credit Suisse will come at a high cost to UBS. Last month, UBS estimated it would lose $17 billion from the deal, including $13 billion in write-downs on Credit Suisse’s assets and $4 billion in legal and administrative costs.

However, analysts say the benefits UBS will receive are not small. Thanks to the acquisition of Credit Suisse, the size of UBS's asset management division increased to 5,000 billion USD overnight. They will also become the world's leading name in the field of asset management for the wealthy. This is the field UBS focused on developing after the 2008 financial crisis.

They are already the leading bank in this segment in China. Therefore, UBS's role in the rest of Asia will be further strengthened when merging with Credit Suisse.

In Switzerland alone, the combined assets of these two banks are now twice the country’s GDP. Deposits are also equivalent to 45% of GDP. This is a huge number, even for a country with solid public finances and low debt like Switzerland.

UBS will also receive Credit Suisse’s profitable domestic business, which analysts say is worth three times the price UBS paid for the entire Credit Suisse deal.

UBS will also eliminate a rival in its equity trading business. Last year, UBS earned $7.1 billion from trading bonds, stocks and currencies. That business brought in $3.2 billion for Credit Suisse.

UBS also expects to make a profit of up to $34.8 billion from buying Credit Suisse at a discount to its book value. This financial cushion will help them offset potential losses and boost second-quarter profits.

UBS also acknowledged that it could save billions of dollars from combining the two banks’ costs, largely through job cuts. The merger could cost tens of thousands of jobs, including in New York and London, where UBS plans to retain only a portion of Credit Suisse’s investment banking business.

The bank also received significant support from the authorities. Last week, the Swiss government agreed to absorb the 9 billion franc ($10 billion) loss from the rescue of Credit Suisse. This was the final major hurdle to completing the merger, helping UBS maintain market confidence during the transition. UBS will also have access to a large loan facility from the Swiss National Bank.

UBS executives still have a lot of work to do on this complex deal, especially deciding which businesses and personnel to keep, replace or eliminate. But they remain optimistic.

In April, Ermotti told CNBC that the Credit Suisse deal was not risky and would generate long-term benefits. Kelleher also said at the UBS AGM in April: "Although we did not initiate the transaction, we believe that it is financially attractive to UBS shareholders. I believe we made the right decision."

Ha Thu (according to Bloomberg, Reuters)

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