In a deal heavily pushed by Swiss and global banking regulators, the large Swiss bank UBS (UBS -0.40%) recently announced that it will acquire the embattled Credit Suisse (CS) in an all-stock transaction valued at roughly $3.24 billion.
Credit Suisse has struggled immensely for the last several years and had hoped to transform itself. But given more struggles last week, significant turbulence in the banking sector, and a threat to Switzerland's economy (and perhaps Europe's as well if the bank went under), global banking regulators pushed a deal through over the weekend.
The credit rating agency S&P Global cut UBS' outlook to "negative" upon the announcement of the deal, citing "material execution risk in integrating CS into UBS." Will this deal be problematic or pay off for shareholders? Let's take a look.
Downside risk protection
The big problem that has surrounded Credit Suisse for years is the firm's investment bank, which clearly has struggled to implement proper risk management protocols. Credit Suisse has racked up billions in losses after certain businesses in the investment bank had outsize exposure to funds like Greensill Capital and Archegos Capital, which both collapsed.
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Prior to UBS' acquisition, Credit Suisse had planned to break up its investment bank into three different pieces, one of which was meant to shelter riskier assets. So the biggest risk UBS faces is winding down Credit Suisse's trading business. This deal was obviously pushed through very quickly, given the potential risk of Credit Suisse collapsing, so UBS clearly hasn't had the time to do proper due diligence and there could be other unsavory surprises lurking.
The good news is that UBS secured significant downside protection from Swiss banking regulators of close to $27 billion, which will be used to cover charges, purchase price adjustments, and restructuring costs. Notably -- and quite controversially, I might add -- about $17 billion of this amount will be used to write off additional Tier 1 bank debt, which bondholders were not pleased with given they are supposed to get paid before owners of common stock. Swiss regulators will also provide roughly $9.7 billion of protection against losses in Credit Suisse's investment bank beyond the first $5.4 billion of losses, which UBS will cover.
Enhancing the UBS franchise
Aside from the downside protection, UBS is also acquiring some very good businesses from Credit Suisse, which will help the bank add scale and improve its existing operations.
Credit Suisse's asset and wealth management division has $1 trillion in client assets and brings UBS' total client assets to $5 trillion, putting the latter well on its way toward its $6 trillion goal laid out at its investor day a year ago. UBS will become the second-largest player in global wealth management and the No. 3 ranked asset manager in Europe. These businesses, which are very attractive these days due to the fact that they are less capital intensive, thrive off of scale, and shareholders tend to reward them with higher valuations, too.
UBS will also get Credit Suisse's domestic banking unit, making it the No. 1 corporate and personal bank in Switzerland, with the largest amount of deposits and loans. Bank of America analyst Alastair Ryan wrote in a research note that the pro forma institution will control a roughly 30% market share of Swiss domestic deposits. In 2022, Credit Suisse's Swiss bank reported an 11.8% return on capital, while the asset and wealth management businesses are also capable of putting up strong returns, especially with the enhanced scale at UBS.
The potential to be a great deal
Because the deal was orchestrated so quickly, there is of course execution risk and the possibility that UBS runs into obstacles as it winds down Credit Suisse's investment bank.
But UBS got a great deal. Last week, Credit Suisse was valued at about $8 billion while trading at all-time lows. UBS scooped the bank up for $3.24 billion while securing significant downside protection. The deal also increases UBS' tangible book value per share by a whopping 74%. Bank stocks trade relative to their tangible book value per share, so increasing it tends to be beneficial in the long term.
In the process, UBS is also making some nice additions to several of its businesses, as well as removing a competitor, and now has an undeniable leading position in Switzerland's banking market. Ultimately, I think the deal has the potential to be beneficial to UBS shareholders over the long-term.
