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Unlike southern European neighbours, Switzerland has had a rainy summer. This week, the sun appeared and cagoules were stashed away. On Friday, Swiss wealth manager UBS said it would dispense with the state’s protective umbrella against potential losses from its hurried takeover of struggling Credit Suisse.
UBS has terminated a $10.3bn loss-protection agreement and a public liquidity backstop of up to $114bn. It has paid back emergency loans.
Bond markets are still shaky. So why the rush? Politics, perhaps?
Taxpayers should be pleased. Regulator Finma and the Swiss National Bank touted the merger as a “private solution” despite a wipeout of AT1 bonds to lessen liabilities. The public backstop meanwhile transferred wealth from the state to private owners, says Pascal Böni at University of Basel.
Benefits totalling about $5bn have already accrued to UBS shareholders and another $23bn to Credit Suisse bondholders.
UBS’s shares have nevertheless trailed the Stoxx Europe banks index. Its valuation has slipped, unlike rival Julius Baer’s. UBS trades at 0.85 times 2024 tangible book according to Jefferies.
The stock jumped 4 per cent on Friday. Shedding state protection saves money. The scheme’s estimated cost to UBS to the end of September is $834mn. The annual running cost after that would have been at least $41mn a year.
If UBS had used loss protection, that cost could have soared by 10 times. Given the billions involved in the deal, even these numbers are hardly thunderous.
UBS bosses Colm Kelleher and Sergio Ermotti have obvious political motives. No commercial bank wants the state looking over its shoulder, especially when making post-deal balance sheet tweaks. Moreover, UBS wants to hang on to the politically sensitive Credit Suisse domestic bank. This has made pre-tax profits of about $1.7bn annually since 2020, according to S&P Global.
The move may have a further implication: UBS has taken a good look at Credit Suisse’s potentially toxic loan portfolio and found little there to fret over.
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