On the first anniversary of UBS Group AG’s historic takeover of its former rival Credit Suisse, it’s becoming clear just how advantageous the deal has been for the bank. It has pushed its market capitalization past US$100 billion to the highest level in almost 16 years and cemented its leading role in global wealth management.
The most obvious effect for the Swiss lender is a growth in scale that would have required many years of painstaking work building client relationships if it were to be achieved organically. Overnight, the client funds managed by its wealth unit jumped by about one-fifth to US$3.4 trillion at the time.
That has brought it closer to Morgan Stanley, which has about US$5 trillion in its wealth management division, even if UBS is bigger in most places outside the US.
The share price boost to UBS wasn’t a given on the Sunday one year ago when the emergency takeover brokered by the Swiss government was announced. The Zurich-based bank’s shares initially plunged by as much as 16% the following day amid uncertainty about what the deal would mean for UBS, pushing its valuation down to below US$60 billion.
The jitters didn’t last long as investors looked at the bargain price tag, the presence of a government guarantee, and the immediate boost to scale from Credit Suisse’s client book. Some observers called it the deal of the century.
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In the 12 months since, UBS’s leadership has returned the guarantee, carved off much of the Credit Suisse assets it doesn’t want, and begun the task of figuring out how the merger can turbo-charge its ambitions.
With the scale added by the Credit Suisse deal has come a push for even more. The bank now seeks to grow invested assets in its wealth management unit to more than US$5 trillion by the end of 2028, equal to an expansion of about US$1.2 trillion over the current level.
The core of UBS is the business of looking after the cash piles of the global rich, with the amount of managed client money towering above its regional peers. The Americas account for about half of that amount, while Switzerland, Asia and the EMEA region, which includes Europe and Africa, roughly share the rest equally between them.
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The breakdown helps explain the Swiss lender’s current focus on a place where it’s big but still remains sub-scale compared with the domestic competition. Chief Executive Officer Sergio Ermotti has signalled that catching up with Wall Street rivals on their home turf will be a key part of his strategy for the coming years.
The latest attempt by UBS to “narrow the gap” on Morgan Stanley and its peers, as Ermotti put it last week, comes after a failed previous effort to add heft in the US, a US$1.4 billion deal to buy robo-adviser Wealthfront. That plan had been abandoned by the time Ermotti returned to lead UBS last year.
UBS’s valuation as measured by the so-called price-to-book ratio still lags its rival’s by a substantial amount.
“We have the cost base of a much larger organization in the US but we don’t have the capabilities yet that allow us to fully leverage our global franchise,” Ermotti said. “We need to have a better footprint in the US.”
This time around, the strategy hinges on using the newly-enlarged investment bank to bring more global products and services to US clients.
UBS doesn’t conceal that there’s still much work ahead in integrating Credit Suisse. Both Ermotti and Chairman Colm Kelleher have warned that 2024 will be a more difficult year in terms of keeping costs down. One of the biggest challenges will be to switch off the rival’s IT systems and get the data to run on UBS’s.
Two straight losses, in the last two quarters of 2023, have also focused attention on profitability. An activist investor, Cevian Capital AB, has built a substantial stake in UBS and signalled that it will push for ambitious targets. UBS’s promise to achieve a return on a measure of regulatory capital known as CET1 of 18% by 2028 did not excite analysts when it was rolled out in February.
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For what it’s worth, the market for the risky debt securities that were wiped out by the Credit Suisse emergency deal is running as hot as it has been for years. The Swiss regulators at the time cancelled all of Credit Suisse’s so-called AT1 bonds worth about US$17 billion, essentially sweetening the deal for UBS.
The decision initially crimped the market as investors reassessed the riskiness of the securities, but they later returned in droves when they decided the Credit Suisse case had unique features that don’t apply to the asset class as a whole.
The spread on one key Bloomberg index of such notes has fallen to its lowest level in nearly two years. This has allowed European banks to pump out US$12.1 billion of AT1s this year so far, making it the second-strongest quarter for the product ever.
UBS is also still getting used to its new role as the sole globally systemically-important bank in Switzerland, where its balance sheet represents more than twice the domestic economy. The government is due to present an overhaul of financial supervision in the coming months, and a debate on the necessity of stricter capital and liquidity requirements for the behemoth bank is underway.
On Tuesday, the Swiss central bank added its voice, saying that a review of the “progression” of capital requirements due to size is needed.
The domestic banks were helped through the uncertainty of the Credit Suisse rescue by rising interest rates and the backing of the government for the rescue solution, said Roman Studer, CEO of the Swiss Bankers Association.
“One year on, we have seen less change than one could have envisaged,” he said. “Despite the collapse of Credit Suisse we have seen enduring stability and a successful banking center.”
