UBS Should Benefit From Credit Suisse Takeover

A week can be a very long time in financial markets. UBS acquiring Credit Suisse for CHF 3 billion a week ago would have seemed like a terrific deal. Now the position is less clear. Credit Suisse likely experienced significant net outflows of client assets last week, eroding its revenue base. We, however, believe that UBS can extract value from the acquisition. It is in a much better position to execute a radical restructuring of Credit Suisse's business than Credit Suisse was. We calculate that UBS' 2027 cost savings target would reduce Credit Suisse's 2022 adjusted operating expenses by around 60%. The restructuring will come with material costs, but UBS is better placed than Credit Suisse to absorb this. The challenge for UBS will be to keep revenue attrition to a minimum during the restructuring period. In a surprise move, the Swiss regulators wrote down the value of Credit Suisse's CHF 16 billion in additional Tier 1 capital to zero, providing UBS with additional capital to absorb markdowns and restructuring charges. In addition, the Swiss authorities will provide a further CHF 9 billion of downside protection. The combined CHF 25 billion of downside protection plus, if needed, liquidity support from the Swiss central bank should ensure that UBS' wholesale funding costs remain in check. The suspension of UBS' share-buyback program is negative, but it could have happened regardless, given current market conditions. We will update our fair value estimate for UBS shortly.