By the end of the summer, UBS could be in a position to waive the federal government's backstop offer and refrain from using the guaranteed 9 billion francs. finews.asia explains why such a move makes sense.

UBS aims to communicate that it will not require the government backstop at its half-year results on August 31, as the «FT» (behind paywall) reported Monday.

According to its investors, the bank is better off without tapping into the funds guaranteed by the state which is reflected in the stock’s 1 percent rise on Monday. UBS did not reply to a request for comment.

finews.asia lists five constraints that make the adoption of the «Loss Protection Agreement» (LPA) of June 9 less attractive.

1. Risk despite Guarantee

With the sale of Credit Suisse to UBS, the Swiss government avoided having to rescue a bank directly with taxpayers' money for the second time in 15 years.

Nevertheless, the state took on considerable risk with the action of March 19. The Confederation had to commit to guarantees for a total of 109 billion francs. This consiss of 100 billion francs to the Swiss National Band - and 9 billion francs to UBS, which wanted to protect itself against losses related to Credit Suisse.

Yet the agreement by no means exempts UBS from risk. The bank would bear the first 5 billion francs of potential losses on Credit Suisse’s assets before the federal government's guarantee would come into play. After a total of 14 billion francs in losses, parliament would then have to decide whether and how further resets would be shared between the state and the bank.

2. Devil in the Details

It cannot be ruled out that the losses could accumulate in view of Credit Suisse’s current positions totaling around 44 billion francs.

UBS and the Swiss government maintain strict secrecy about the exact nature of the balance sheet items in question. This is not without reason. If the financial markets knew what UBS was trying to get rid of, they would try to exploit it mercilessly.

The tactic could be to sell the positions piece by piece as and when. This could take years, considering that UBS has still not completely liquidated the «non-core» portfolio that CEO Sergio Ermotti weeded out during his first tenure at the UBS investment bank starting in 2011.

UBS now faces the same procedure as with Credit Suisse Securities. These were already assigned to a liquidation unit last fall under former Credit Suisse CEO Ulrich Koerner.

UBS has spoken about loans, derivatives and structured products. These items are generally so illiquid that they are listed as «Level 3» on the balance sheets of Credit Suisse and now UBS. This means that the banks are allowed to calculate the value and risk of those assets according to their own models. This does not make UBS's assessment any easier.

UBS has 120 days from the conclusion of the contract in June before it can start writing off positions and it is working flat out to sift through the positions for the worst loss-makers.Rumors of a possible exit from the contract, could indicate that the bank is making progress in screening Credit Suisse positions - and that the findings may be less toxic than expected.

3. Costs weigh

If the dangers of the Credit Suisse portfolio are considered less acute, the costs of the state guarantee must weigh all the more heavily from UBS's point of view. UBS paid 40 million Swiss francs when the contract was signed, plus quarterly costs of 9 million Swiss francs from the fourth quarter of 2023.

Likewise, UBS had to commit to keeping its headquarters in Switzerland in exchange for the guarantee, and it has to pay for the ongoing costs of the federal government under the guarantee agreement. If the state actually steps in to cover losses, it may also charge the bank annual fees of up to 360 million francs.

There is no guarantee that the compensation for losses will be paid at all and there are time-related constraints. UBS may only claim a guarantee payment in five years - and this is only the case if less than 20 percent of the original value of the Credit Suisse portfolio is still intact.

UBS would also have to pay for any further losses on the remaining assets in the portfolio.

4. Political Dynamite

The LPA contract also stipulates that representatives of the federal government are to sit on the supervisory committee that oversees the reduction of guaranteed positions.
In short, the state guarantee gives the federal government additional leverage at UBS.

This could be the case as early as the end of summer, when it should finally become clear what will happen to Credit Suisse’s Switzerland business. All signs indicate that this business will be integrated into UBS, inevitably leading to the loss of thousands of Swiss jobs.

Politicians have already outlined measures in case this scenario materializes; there are blatant threats to massively increase the capital requirements of the new «megabank» if Credit Suisse disappears.

Further-reaching demands to «tame» UBS could also be pushed through by means of popular initiatives. UBS, after its own rescue in 2008 and now after the demise of Credit Suisse, can hardly hope for support among the population.

5. Question of Honor

UBS CEO Ermotti has repeatedly said that the bank will do everything in its power to avoid burdening taxpayers with the integration of Credit Suisse.

Ermotti, who at the age of 62 has once again stepped up to take on the most difficult job in Swiss banking, has described it as an honor to have been asked back to the driver’s seat.

Considering the high incurred costs for UBS through the loss guarantee, Ermotti has reason to keep his word when it comes to his promise to taxpayers’ monies.