UBS on Thursday posted a record $28.88 billion earnings in the second quarter after taking over its stricken rival Credit Suisse earlier this year. The announcement is seen as a major breakthrough for the largest bank in Switzerland, as analysts forecasted a meager net profit of $12.8 billion in the second quarter.
According to UBS, the earnings primarily represents the negative goodwill on acquisition of Credit Suisse. The negative goodwill reflects the fair value of assets that were acquired in a merger between UBS and Credit Suisse, above the purchase price. To acquire Credit Suisse, UBS paid a discounted amount of 3 billion franc ($3.4 billion) in March this year.
The results had long been awaited by the market, as they were first scheduled to be released on 25th of July, which reflects the completion of Credit Suisse takeover on June 12. However, it is worth reminding that the complete integration of Credit Suisse business and processes may take up to several years.
Earlier this month, UBS announced that it had ended a loss protection agreement worth 9 billion Swiss franc or ($10.24 billion) and a liquidity backstop worth almost 100 billion francs that were set in place by the government to mitigate operational risks.
The results are also a positive omen for UBS as it suffered a 52% drop in its annual earnings, a quarter before, this shocking disclosure came amid a legacy litigation related to mortgage-backed securities.
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Absorbing the domestic arm of “Credit Suisse”
In a major move on Thursday, UBS decided to completely absorb the domestic bank of Credit Suisse. The decision may face a backlash in the public domain and might be challenged in the courts, as it could result in the loss of thousands of jobs.
The announcement of absorbing the domestic arm of Credit Suisse was long-awaited, just like the second quarter earnings report, which came in simultaneously. These are the two major developments since UBS took over Credit Suisse earlier in March this year.
Alternatively, UBS could have spun off the business and launched it in an IPO, but the domestic bank was an underdog performer for Credit Suisse, giving high profits even under the dark last year.
In his statement to the public on Thursday, CEO of UBS Sergio Ermott said “Our analysis clearly shows that a full integration is the best outcome for UBS, our stakeholders and the Swiss economy.”
He further added that, “The two Swiss entities will operate separately until their planned legal integration for 2024 with the gradual migration of clients onto UBS systems expected to be completed in 2025.”
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The “Cost-Saver”
UBS group, the world’s largest wealth manager is hoping for a massive cost saving as a result of this deal. They have revised their cost-saving targets, projecting a $10 billion reduction in costs by the end of 2026, up from $8 billion previously expected till 2027. Most of these savings will be coming through the layoffs and a reduced wages expense.
Even though UBS is claiming public confidence, it saw net outflows at 39 billion swiss franc or ($44.4 billion) in the second quarter. However, UBS says that the outflows are taking place at a reduced pace than in previous quarters, and a reverse trend was witnessed in June.
The future prospects
This unlikely and unheard merger of two globally systemic and renowned banks, at the behest of the Swiss government, has created both opportunities and risks for UBS. On one hand, analysts mention that UBS had acquired its rival Credit Suisse pretty cheap – just 3 billion swiss franc – while benefiting from a good clientele, talented employees, and most importantly a large asset base.
Moreover, UBS stock has gained nearly 30% since taking over Credit Suisse, hovering at its 15 year high.
On the other hand, analysts are warning against the complexity of the deal which brings significant operational risks as a result UBS might go for aggressive layoffs, managing outflows, Credit Suisse’s investment banking arm, and winning trust of its new clientele.
($1 = 0.8784 Swiss francs)
