Switzerland’s biggest bank will become even bigger with the forced takeover. But will it perhaps be too big for the country? This alone will be a major topic of discussion at UBS in 2024 and keep the financial hub on tenterhooks.
At the start of 2022 and 2023, finews.asia dared to provide an outlook on the «agenda of fear» at Credit Suisse (CS). The problems of Switzerland’s second largest major bank were already so numerous at that time that they took up the financial conglomerate’s attention month after month and diverted it from its actual operational business.
One consequence of this was the increasing erosion of trust, which eventually resulted in a first (October 2022) and second bank run last March – and the forced sale of the bank to Swiss competitor UBS.
(Image: UBS)
In acquiring CS, UBS has not only inherited a toxic past, but is tackling a task that has never been seen before in the banking industry in terms of its complexity and import as it seeks to integrate the new subsidiary bank.
And as if those challenges were not big enough, UBS’ top brass, including CEO Sergio Ermotti and Chairman Colm Kelleher, also have to keep an eye on a number of external risks. All in all, the “new” UBS will have to clear several hurdles in the next few months. These are:
1. Months of Monotonous Minutiae
The era of quick wins for UBS’ management is over, especially since the decision to fully integrate CS Switzerland last August. Now comes the monotonous minutiae of integrating. The coming months will be crucial: 2024 should see the start of the process of transferring CS clients from the core areas to the UBS platform.
This will be an IT exercise that has never been undertaken on this scale before and is fraught with risk, especially delays. At the same time, there will be around 3,000 job cuts in Switzerland alone. The misgivings targeted at UBS, which has won early plaudits so far, will therefore only become louder.
2. Pinch of «Populism» is Looming in Spring
UBS CEO Ermotti no doubt thinks that Switzerland needs an even larger banking giant in order not to fall behind in the global competition between financial hubs. But he believes the new UBS, with the addition of CS, does not need any additional capital. «It does not need even more expensive capital. Saying that’s pure populism,» the manager blurted out in a recent media interview.
(Image: Parlamentsdienste / Tim Loosli)
But Ermotti’s position is not shared by everyone, especially the Swiss finance minister Karin Keller-Sutter. The federal councilor wants to present an evaluation to the parliament next spring on the «too big to fail» regulation for systemically important banks. And when she does a key question will be UBS’ additional capital requirements.
There will be no taboos: Keller-Sutter says that «all the uncomfortable questions will be thoroughly discussed» in the forthcoming evaluation. But the federal councilor has different priorities than UBS’ CEO. «The primary objective is to safeguard the state and taxpayers,» the finance minister stressed.
3. Will the Activist Raise Its Voice at the AGM?
The vision of UBS as a global «Wealth Management Powerhouse» has sparked a lot of speculation in the financial markets. Since the takeover of CS last March, UBS’ market value has almost increased by half. High-powered professional investors, and not just small shareholders, have made additional purchases. One of them, Cevian, acquired UBS shares worth around 1.2 billion euros ($1.3 billion) last December and expressed high hopes when it stepped onboard. The Swedish financial investor thinks the major bank could double its stock price to 50 Swiss francs ($59) within a reasonable period of time.
Cevian is not known for limiting itself to being a passive spectator when it is a major shareholder. The Swedes have a reputation for being activist investors who know how to assert their demands. The question now is whether the bank’s major shareholders will still be in festive mood at UBS’ AGM on April 24 – or whether the bank’s management will strongly make the case for even more momentum.
4. CS Investors Demand Billions of Dollars
The forced sale to UBS helped stabilize CS. However, the low selling price and decision by the Swiss Financial Market Supervisory Authority (FINMA) to write off the crisis-hit bank’s contingent convertible bonds (AT-1 bonds) worth nearly 16 billion Swiss francs unleashed an outcry in the financial markets. Since then, collective plaintiffs have been forming, with the focus for the moment still on Switzerland.
So thousands of CS shareholders have filed class action lawsuits at Zurich’s commercial court against the exchange ratio of CS to UBS shares when the bank was sold. They want twice the amount that UBS paid for CS.
Meanwhile, AT-1 investors have filed a complaint with the Federal Administrative Court against Finma, which pushed through the write-down of the contingent convertible bonds using an emergency law. The complainants cited the proportionality of the approach as their argument. But they could also claim unlawful expropriation, which would hold the federal government accountable for compensation, with taxpayers ultimately footing the bill.
Both issues are significant for UBS. The shareholders’ class actions are directly targeting the major bank and seeking a higher price for CS shares. In the complaint before the Federal Administrative Court, the UBS is currently merely an involved party. But if the AT 1 creditors were to succeed with their claims before the court, the previous state of affairs would have to be restored and the AT 1 bonds would have to be reactivated – but this time on UBS’ books.
The accounting windfalls the bank racked up in 2023 would thus likely evaporate.
5. Even Legacy Issues Are Still a Talking Point
Whereas CS, under its long-time former chairman Urs Rohner, opted for maximum resistance in lawsuits, UBS seeks to quickly resolve the legal legacy issues of its new subsidiary. Progress has already been made in the Mozambique affair, the collapse of Archegos, and the dispute with the wealthy Georgian Bidsina Iwanischwili (Image below).
(Image: PD)
But the numerous collective lawsuits that were filed in the US before CS’ downfall have not even started properly yet, and that’s just one thing. Switzerland’s biggest bank is facing another front in the next few months, with only one thing that can be predicted with certainty: dealing with CS’ legacy issues will be headline-grabbing and costly.
The taking on of the legacy issues from the numerous scandals that CS has experienced in recent years were «included» in the purchase of the big bank from the outset. UBS has booked more than 4 billion dollars in provisions for Credit Suisse’s legal risks during the past year. The bank itself has also set aside more than 6.13 billion dollars for legal and regulatory matters.
6. Gallic Goading
In the tax dispute with France, UBS was once again denied a breakthrough last November. Instead, the dispute with the neighboring country's justice system, involving hundreds of millions of euros, moved to the next round after almost ten years.
The court of cassation in Paris overturned the decision of the lower court on Wednesday on penalties and requested a new hearing before the court of appeal. It was a blow for the big bank that the final verdict upheld the accusation of illegal client solicitation and money laundering of the proceeds from tax fraud. It would be too heavy a blow to UBS’ reputation to accept the claim that they had acted criminally.
So the next round in the ongoing dispute, which has been rumbling on for almost ten years now, seems unavoidable, and Ermotti will have a sense of deja vu: the appeal to the court of appeal took place during his first term of office as head of UBS.
7. PUK to Have Final Word
A parliamentary investigation commission (PUK) will comprehensively examine the emergency takeover of CS and the associated Federal Council decisions. It was initiated last June and its members began their work in October with the start of the hearings. But at the end of 2023, PUK chairwoman Isabelle Chassot announced that the commission’s report would not be released until the end of 2024 – the end of the expected deadline of 12 to 15 months after it was formally established.
(Image: Keystone)
The extension is rather inconvenient for the parties involved in the CS rescue, as in many critical cases and decisions, they have referred to the PUK’s findings, which must first be awaited. The result is a standstill, at a time when the new Swiss megabank should be powering ahead to secure its future and draw lessons from the rescue operation for the future.
