Business Context and Reporting Period
Company: UBS Group AG (and UBS AG)
Filing Date: March 20, 2023 (Reporting on events of March 19, 2023)
Event: Announcement of the acquisition of Credit Suisse Group AG.
Context: Following urgent requests from global regulators to preserve financial stability, UBS agreed to acquire Credit Suisse. The transaction was facilitated by Swiss government emergency powers, bypassing the need for shareholder resolutions. The deal is structured as an all-stock transaction with an exchange ratio of approximately 22 Credit Suisse shares for one UBS share, valuing the equity consideration at approximately CHF 3 billion.
Key Financial Metrics and Transaction Terms
- Transaction Value: Approximately CHF 3 billion in equity consideration (significant discount to Credit Suisse's pre-crisis market cap).
- Downside Protections: UBS secured at least CHF 24 billion in protection from Swiss authorities. This includes:
- FINMA write-down of CHF 15 billion of Credit Suisse AT1 instruments.
- CHF 9 billion loss protection from Swiss authorities for losses exceeding CHF 5 billion incurred by UBS.
- 50/50 sharing of any further potential P&L beyond the protected amounts.
- Liquidity Support: Access to a long-term secured liquidity facility from the Swiss National Bank (SNB) for both Credit Suisse and the combined entity.
- Capital Position: Approximately CHF 56 billion of goodwill will be recognized, boosting CET1 capital. The pro forma Core Tier 1 ratio is expected to be approximately 14% on day one (post-badwill recognition, pre-marks).
- Combined Scale: Total assets under management (AUM) expected to reach approximately $5 trillion.
- Wealth Management: ~$3.5 trillion.
- Asset Management: ~$1.5 trillion.
- Investment Bank: On a pro forma day-one basis, the investment bank will account for approximately 25% of group Risk-Weighted Assets (RWA), excluding non-core assets.
Material Changes and Strategic Impact
- Shareholder Returns: UBS will temporarily suspend its share repurchase program. The progressive dividend policy remains intact, including the 2022 dividend subject to AGM approval.
- Cost Synergies: Management expects to realize more than $8 billion in run-rate cost reductions by 2027. This includes approximately $6 billion from FTE reductions and $2 billion from IT systems.
- Profitability Outlook: Returns on tangible equity are expected to dip below the 15% to 18% target in the near-to-medium term due to integration expenses and the Credit Suisse turnaround. The transaction is expected to be EPS-accretive by 2027.
- Strategic Rationale: The acquisition accelerates UBS's organic growth strategy, particularly in Asia Pacific (Southeast Asia) and Latin America, and solidifies its position as the undisputed leader in Switzerland. The investment bank will be rightsized, with non-core trading operations managed in a separate division for run-down.
Guidance, Risks, and Contingencies
- Integration Timeline: The integration of core businesses is expected to take three to four years, excluding the non-core rundown.
- Regulatory Risks: While competition clearance was received in Switzerland, regulatory approvals are still required in other jurisdictions. The transaction relies on emergency ordinances which may face legal challenges.
- Operational Risks: Significant integration risks exist, including the management of Credit Suisse's non-core assets and litigation exposures. UBS has taken marks for expected litigation settlements but noted that litigation risks remain.
- Market Risks: Forward-looking statements are subject to risks including the Russia-Ukraine war, global inflation, market volatility, and potential changes in regulatory capital requirements (G-SIB).
- Capital Requirements: Management indicated that G-SIB surcharges are not expected to be a constraint in the medium term due to consistent treatment with FINMA. The target CET1 ratio remains unchanged.
Key Facts for Investor Verification
- Verify the final regulatory approvals required in key jurisdictions (US, UK, EU) and the timeline for closing.
- Monitor the actual drawdown on the SNB liquidity facility and the stability of deposit flows post-announcement.
- Track the progress of the non-core asset rundown and the associated P&L impact versus the CHF 24 billion protection cap.
- Assess the realization of the $8 billion cost synergies and the timing of restructuring charges impacting near-term earnings.
- Confirm the final pro forma capital ratios after purchase price accounting adjustments (US GAAP to IFRS) and fair value marks on debt.