April 25, 2023
UBS Group AG is likely to report a gain of as much as 51 billion Swiss francs, or about $57 billion, in second-quarter profit tied to its acquisition of Credit Suisse Group AG. The gain comes from negative goodwill, an accounting result that recognizes how little UBS paid relative to the value recorded on Credit Suisse’s balance sheet. UBS agreed to pay roughly $3 billion for its stricken Swiss rival. Credit Suisse had book value of 54 billion francs at the end of March.
The first lesson is that the headline profit may be enormous without saying much about the earning power of the combined bank. UBS guided that it would recognize a “material gain” from the deal, but did not give a precise number. The final amount could still be affected by restructuring charges, asset markdowns or litigation provisions. Credit Suisse had already taken a 1.3 billion franc impairment charge, mostly related to its wealth management business.
UBS agreed to take over Credit Suisse in an emergency sale backed by the Swiss government, after a crisis of confidence raised fears that Credit Suisse was moving toward bankruptcy. Analysts have noted that Credit Suisse’s local Swiss Universal Bank may be worth multiple times what UBS paid for the entire company. In deal work, this is the strange beauty and danger of distressed M&A: the buyer can look brilliant on day one while inheriting years of operational and political risk.
The takeover also included the write-down to zero of almost $17 billion of Credit Suisse additional tier 1 capital, also known as contingent convertible bonds. That same write-down helped Credit Suisse produce a record profit in what was likely its final quarter as an independent company. If UBS books the projected gain, it would surpass the modern banking profit high-water mark for US and European lenders. JPMorgan Chase & Co. earned $14.3 billion in the first quarter of 2021, while Industrial & Commercial Bank of China Ltd. has exceeded that level in several quarters.
That comparison is useful, but it should not be confused with ordinary operating performance. Many investors will view the UBS gain as an accounting quirk rather than proof that the combined franchise is suddenly generating historic earnings. UBS may delay publication of second-quarter results to prepare statements for the combined group. The badwill is expected to help maintain UBS’s common equity tier 1 capital ratio and cover accounting marks and restructuring costs from integrating the businesses and winding down unwanted assets.
UBS has not yet disclosed details on job cuts or restructuring costs. It plans to provide more information on the combined company’s financials and the size of its non-core wind-down unit at second-quarter earnings, assuming the deal closes in May. For bankers, the number is not the answer; the real question is how much of the apparent bargain survives purchase accounting, legal exposure, client attrition and restructuring. That is exactly the kind of nuance candidates should be ready to explain in interviews when asked whether a low purchase price automatically makes a deal attractive.
UBS brought back Sergio Ermotti as chief executive officer to oversee the takeover. Chairman Colm Kelleher has said the merger could take as long as four years to complete. The Swiss government agreed to bear as much as 9 billion francs of losses on certain non-core assets after UBS absorbs the first 5 billion francs. Losses from Credit Suisse businesses not placed in the wind-down unit would hit profit directly and would not benefit from those established protections.
This is where accounting meets judgment. UBS has an incentive to be prudent in classifying incoming Credit Suisse assets, because the line between core and non-core can determine who absorbs future pain. A $57 billion gain sounds like a triumph. The harder test is whether UBS can turn a forced rescue into a durable institution without letting the bargain price become a distraction from the integration risk.