(Bloomberg) - UBS Group AG investors are bracing for plenty of superlatives and drama as the Swiss lender prepares to unveil the first quarterly results since taking over Credit Suisse in an unprecedented government-led rescue.
Five months after agreeing to the deal, Chief Executive Officer Sergio Ermotti is expected to report one of the biggest windfall profits ever recorded by a bank on Thursday, along with potentially billions of dollars in writedowns on assets and details on the future of thousands of jobs.
More important than the numbers will be indications of progress in integrating Credit Suisse, particularly with respect to the wealth management business and the future of its Swiss unit. Investors will also parse Ermotti’s comments for fresh clues as to his strategic vision for what’s now the only global universal bank left in Switzerland.
More on the takeover:
UBS to Hasten Credit Suisse Deal as $10 Billion Safety Net Ends
UBS Poised to Absorb Credit Suisse Domestic Bank, Drop Brand
UBS Sees $35 Billion Gain on Credit Suisse, Warns on Costs
UBS to Dispose of Risky Credit Suisse Loans to Asian Clients
UBS Preparing to Cut Over Half of Credit Suisse Workforce
A UBS veteran who spent his first stint as CEO turning the lender into a model wealth manager after its near-failure in the financial crisis, Ermotti is keenly aware of the political sensitivities surrounding the Credit Suisse deal, which he was brought back to oversee. In a surprise move this month, UBS decided to voluntarily give up a safety net negotiated as part of the purchase, including a 9 billion-franc ($9.4 billion) government backstop.
The decision reduces the potential for political fallout and public discontent as UBS is likely to post an accounting windfall of some $35 billion after buying Credit Suisse at a steep discount to book value, while also targeting tens of thousand of jobs for elimination. The accounting gain is likely to result in one of the biggest bank profits on record and could surpass JPMorgan Chase & Co.’s $14.3 billion in the first quarter of 2021, the modern record for US and European lenders.
Giving up the state guarantees may also make it easier for UBS to integrate Credit Suisse’s Swiss business, a contentious issue because it will further strengthen its dominant position at home. UBS had long signaled its preference to keep the domestic unit, but Switzerland’s elections in October had forced executives to downplay their plan.
UBS is now poised to decide in favor of fully integrating Credit Suisse’s domestic bank, while winding down the Credit Suisse brand in the country, people familiar with the matter have said. An announcement could happen along with the presentation of earnings on Aug. 31.
Apart from ensuring the smooth transition of millions of retail accounts, the decision also affects thousands of jobs. About 30% of the megabank’s combined staff is in Switzerland, though that includes employees who are based in the country but work for corporate functions or in wealth and asset management.
Globally across the combined firms, some 35,000 jobs are expected to go, most of them at Credit Suisse. Staffers have already been told to expect three rounds of cuts this year, including two tentatively planned for September and October, people familiar with the matter have said. Ermotti said in June that 10% of Credit Suisse’s staff had already left since the acquisition.
UBS’s executives estimated early on that they could save $8 billion in costs, with some $6 billion coming from staff cuts and about $2 billion from IT and other infrastructure. With five months to digest the deal, UBS may be able to provide more detailed figures on Thursday on how much the integration will cost and how much it will ultimately gain.
One area where UBS has been trying to hold onto Credit Suisse bankers is wealth management. Combining the two private banking and asset management businesses charts a path for UBS to surpass the $5 trillion mark in assets managed for the world’s wealthy and institutional money. But that’s only if it manages to stem outflows at Credit Suisse that have likely continued since the panic in March.
Credit Suisse reported 61 billion Swiss francs in asset outflows and a reduction of 67 billion francs of customer deposits for the first quarter. It is expected to report billions more in outflows for the second quarter, people familiar said. The figures may be difficult to decipher because UBS intends to consolidate flows for Credit Suisse and not give a breakdown by unit, one of the people added.
Complicating matters, the banks have historically differed in how they account for assets managed, with UBS focusing on assets for which it earns fees while Credit Suisse took a broader definition. That means some attrition in managed assets at the combined bank may stem from a reclassification, people familiar with the matter said.
While wealth management remains a focus for growth under Ermotti, UBS is planning to exit billions of dollars in complex loans to Credit Suisse’s wealthy clients in the Asia Pacific region. The full perimeter of what will be wound down is expected with the publication of earnings. It will include a portfolio of “difficult-to-assess” illiquid assets, including long-dated derivatives as well as swaps.
It’ll likely also include any trading positions or financings Credit Suisse’s investment bank has committed to that require more capital than UBS is willing to allocate. The bank may also have to review its exposure to debt deals where both banks served as underwriters when they were still competitors.
UBS’s decision to forgo state guarantees means it won’t have the Swiss government or its regulators sitting in on every decision it makes on what and how it exits Credit Suisse business it doesn’t want — a condition that came attached to the backstop.
By Celia Bergin, Marion Halftermeyer and Demetrios Pogkas
With assistance from Myriam Balezou
