UBS has slipped the surly bonds of state guarantees and liquidity injections with a bang. It still has a thick cushion to handle the integration of Credit Suisse.

By opting out of the state guarantee, UBS has done a great service not only to Swiss taxpayers but also to itself. The backing was supposed to secure a potentially toxic portfolio of securities at Credit Suisse's investment bank, and came with various clauses and considerable costs for UBS,  finews.asia observes.

The bank paid 40 million Swiss francs ($46 million) when the contract was signed, and additional quarterly costs of 9 million francs starting from the fourth quarter would have been incurred. UBS also had to commit to keeping its headquarters in Switzerland for the guarantee and pay for the federal government's cost of guaranteeing the contract. Had the state stepped in to cover losses, it would also have been allowed to charge the bank annual fees of up to 360 million francs.

A Cushion Worth Billions

As it turns out, the state guarantee isn't the only protective buffer that UBS used to secure the deal that was foisted on it by the federal government and regulators to take over Credit Suisse.

By acquiring Credit Suisse for three billion francs while it had a market value of around 7.4 billion francs, UBS created a cushion worth billions against setbacks from the outset. On top of that is the full Finma-induced write-down of mandatory convertible bonds issued by Credit Suisse for 15.8 billion francs, which were used to pad Credit Suisse's equity and expected to give UBS a $35 billion first-half accounting profit.

Thanks to the elimination of the AT1 mandatory converters, UBS will even save on interest costs at Credit Suisse in the future which analysts estimate at $1 billion annually.

Threading the Needle

Another factor that shouldn't be underestimated is UBS receiving a green light from the supervisory authorities to scale down Credit Suisse's investment banking operations, which UBS has begun to do. It'll probably make far more radical cuts in the Markets trading unit than in Global Banking. Considering the investment bank incurred annual costs of around $7 billion last year, UBS can book enormous savings by downsizing it.

JPMorgan analysts calculate the net restructuring costs of the integration at $8.2 billion. Thanks to Credit Suisse's investment bank alone, UBS could comfortably thread the needle between savings and expenses.

It's worth bearing in mind the Swiss Financial Market Supervisory Authority (Finma) granted UBS an equity moratorium through the end of 2029. This means the combined bank will have to build up expensive core capital less quickly than would normally be required given its size and associated risks. It's another area where UBS can potentially save billions of dollars for the time being.

Points for Sergio Ermotti

It's certainly true that by returning the federal guarantees, UBS is escaping political influence, even if only to a certain extent. Parliament hasn't given its blessing to the federal government's actions in the takeover, and a parliamentary commission of inquiry (PUK) will look into the events leading up to the bailout last March. Various parties have launched initiatives to force UBS to increase its capitalization and reduce its risks.

Sergio Ermotti had a small victory on Friday with the announcement, having promised several times Swiss taxpayers wouldn't be stiffed for the tab in paying for the deal.

He's acted on his promise earlier than expected.