UBS Says Its Rescue of Credit Suisse Was a Rushed Deal With Unclear Risks

But a $35 billion day-one profit from the rescue could soothe frazzled nerves

The logo of Swiss bank UBS is seen at its headquarters in Zurich, Switzerland, on Feb. 17, 2021. (Arnd Wiegmann/Reuters)

Switzerland’s biggest bank UBS said that it was unable to carry out a comprehensive assessment of the assets and liabilities of Credit Suisse as it was pushed by regulators to take over its beleaguered rival in a rushed rescue to stem financial contagion and prevent a systemic meltdown.

UBS said in May 16 regulatory filings with the Securities and Exchange Commission (SEC) that it had just several days to carry out complex due diligence on Credit Suisse before agreeing to purchase the collapsing bank in March.

The rushed due diligence—basically an assessment of a bank’s assets and liabilities—means that the picture of the impact of the rescue deal on UBS, including its value and share price, is encumbered by an added layer of risk.

Still, some of the numbers UBS tossed around in the filing suggest that Switzerland’s biggest bank will end up doing well.

Limited But ‘Intensive’ Due Diligence

Credit Suisse ran into deep trouble after it endured a particularly difficult year that saw its stock price plummet following a string of scandals and multibillion-dollar losses.

On March 15, the Swiss central bank tossed Credit Suisse a $54 billion lifeline, but market participants worried it wouldn’t be enough.

While this bought a little time, anxious regulators ended up approving a takeover of Credit Suisse by UBS within days amid a broader crisis of confidence in the banking sector as the twin failures of Silicon Valley Bank and Signature Bank in the United States worried investors.

“To calm markets and avoid the possibility of contagion in the financial system, the Swiss government had determined that a decision would need to be made before the opening of markets following the weekend,” UBS told investors in the filing.

UBS said it had just four days to conduct a limited but “intensive” due diligence—basically an analysis of Credit Suisse’s assets and liabilities—before deciding on whether to go ahead with the rescue.

On March 19, the Swiss central bank announced UBS would buy Credit Suisse for around $3.4 billion.

But the “emergency circumstances” under which UBS said it carried out its rushed due diligence may have impacted its ability to fully evaluate Credit Suisse’s assets and liabilities.

“It is possible that UBS Group AG will have agreed to a rescue that is considerably more difficult and risky than it had contemplated,” it said.

“This could affect the future performance of UBS Group AG, its share price, and its value as an enterprise,” the lender warned.

However, a deeper dive into the numbers disclosed by UBS in the filing suggests that the deal may end up being sweeter than rushed due diligence might suggest.

A Sweet Deal?

As can be expected in a complex resolution (or orderly liquidation) of a big financial institution like Credit Suisse, there is a mix of costs and benefits to the party—in this case, UBS—that purchases its assets and assumes its liabilities.

The rushed nature of the rescue adds to that complexity and injects more risk. For instance, UBS warned in the filing that it might not realize all the expected cost reductions of the transaction or that combining the two companies might prove more challenging or costly.

“UBS Group AG currently expects that the transaction will result in a number of benefits, including that it will ultimately be accretive to UBS Group AG’s earnings per share,” the bank said.

However, it cautioned that “this projection is based on preliminary estimates that may materially change.”

Still, when it finalizes the deal at the end of this month, UBS expects to make a day-one profit of nearly $35 billion.

That’s because UBS will be able to book a one-off gain stemming from a so-called negative goodwill of $34.8 billion since it bought Credit Suisse at a fraction of its book value.

UBS is buying Credit Suisse (which the filing indicates was worth roughly $49 billion at the end of last year) for around $3.5 billion.

At the same time, UBS estimated that the sum total of all the losses on Credit Suisse assets and provisions for litigation would reduce Credit Suisse’s value by around $28.3 billion. However, that would be offset by $17.1 billion from a write-down of Credit Suisse junior bonds, among other factors.

That would bring the total day-one hit to roughly minus $11.3 billion, which, when set against Credit Suisse’s approximate book value of $48.8 billion, leaves UBS with roughly $35 billion.

UBS cautioned that the numbers could change if some of the downside risks materialize, including expenses from settling lawsuits.

Shares of UBS were up 0.61 percent in early trading Wednesday, a day after it filed the documents with the SEC and investors digested the estimated mix of costs and benefits of the deal.

‘Exceptional Situation’

Credit Suisse dropped a bombshell on March 14 when it announced that it discovered “material weaknesses” in its financial reporting that would result in a material misstatement of its annual financial statements.

The following day, its biggest shareholder, Saudi National Bank, ruled out increasing its stake in the Swiss bank because of regulatory restrictions.

Credit Suisse’s stock price then fell by nearly 20 percent in a week while regulators fretted about growing risks to financial stability.

Swiss officials scrambled to figure out how to save the 167-year-old banking giant before UBS swooped in for the rescue.

“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” Swiss National Bank (SNB) said in a statement.

As part of the agreement, the central bank committed to providing emergency liquidity support of around $100 billion.

During a March 19 press conference, Swiss President Alain Berset said the UBS rescue was the “best solution” to calm worried investors and bolster confidence in the banking sector.

“The takeover of Credit Suisse by UBS is the best solution for restoring the confidence that has been lacking in financial markets recently and for best managing the risk to our country and its citizens,” he said at the time.

The failure of California-based Silicon Valley Bank on March 10 sparked a crisis of confidence that sent ripples across the global banking industry.

Emel Akan contributed to this report.