CSGKF - Credit Suisse: It Is Over

2023-06-06 00:46:03 ET

Summary

• The Saudi National Bank, Credit Suisse's largest shareholder, decided not to leave Zurich and plans to convert its 9.88% equity stake into UBS securities.
• The Swiss government was forced to implement a systemic solution. We decided to remain neutral, continuing to buy rate UBS.
• UBS will likely complete the Credit Suisse acquisition by mid-June.

Our most devoted readers know that we have always been skeptical of the Credit Suisse investment case ( CS ). We initiated the coverage with an analysis emblematically titled " Valuation Is Less Important Than Earnings " and in 2022, we negatively reported the Three Profit Warning releases. That is easy to say now, but we were the first ones to report Credit Suisse's negative developments. Before commenting on the latest news, the Saudis decided to not leave Zurich. Indeed, the Saudi National Bank was the group's largest shareholder with a 9.88% equity stake and now intends to convert into [[UBS]] securities, thus coming to control 0.5% of the combined entity. As a reminder, in December 2022, the Saudi National Bank was one of the anchor investors in Credit Suisse's capital increase. However, Ammar Al-Khudairy's statements (former Saudi National Bank president) triggered CS's stock price and forced the Swiss government to implement a systemic solution.

According to Reuters, UBS is set to complete its acquisition before mid-June . UBS and Credit Suisse are both global multinational investment banks and financial services firms and in the European Economic Area, their businesses overlap in wealth management and investment banking. Based on the investigation, the European Commission found that the potential business combination would not substantially scale down the competition and the new entity will continue to face significant competitive pressure from a wide range of corporations, including several major global banks, as well as specialist and local players. The EU concluded that the proposed transaction would not raise competition concerns in any of the markets it examined in the European Economic Area. Despite that, the acquisition is still pending SEC approval.

Upon completion of the transaction, CS's stocks and American Depositary Shares will be delisted from both the Swiss Exchange and the NYSE. Credit Suisse's 167-year history was wiped out in a weekend and with the de-listing process, we can conclude that it is over now. UBS agreed to pay CHF 3 billion and assume up to CHF 5 billion in losses for its smaller rival on March 19. As part of the proposed transaction , CS's shareholders will receive 1 UBS stock for every 22.48 shares previously held. Upon completion of the merger, the combined group will oversee $5 trillion in assets, giving UBS a leadership position in key markets, as well as becoming the undisputed leader in Switzerland.

In analyzing the regulatory news, we should report that Credit Suisse backtracked on establishing a local bank in China to avoid potential regulatory conflict arising from the UBS combination. According to Reuters , UBS already has a local bank in China, and in the region, a financial firm may apply for (and obtain) only one financial license. Credit Suisse's Chinese joint venture (it owns 51%) is likely to be sold. The Swiss bank's JV employs 234 people and reported a net loss of 254 million yuan in 2022 due to lower investment banking fees.

Credit Suisse Impact on UBS Accounts

So far, Credit Suisse's rescue has proved to be a bargain for UBS. After the Q1 results, UBS's accounting gain was set at USD 34.8 billion thanks to the rival bank purchase. However, we should also consider the negative goodwill that emerged from the transaction. Despite that, UBS's cost was set at USD 14.1 billion which is much lower than Credit Suisse's capital equal to USD 48.8 billion. The difference will help absorb future losses and give a strong boost to the second-quarter profit for the buyer. Aside from the UBS purchase price, we should also include transaction costs and legal fees for a total of approximately USD 10.6 billion. This second category also includes the Swiss credits write-down and financial assets value adjustments given the illiquid nature of some positions. In addition, UBS underlines that the estimate of negative goodwill is " preliminary " and that " the final account could differ materially from the figure presented ". Looking at the UBS report, the bank also discloses another piece of information to the market: a USD 4 billion provision to cover potential legal and regulatory costs arising from the acquisition. In fact, immediately after the rescue, both the group and the Swiss institutions ended up at the center of a formidable legal battle. At the end of April, a group of investors who hold bonds of the Swiss group, for a value of USD 4.5 billion, filed a lawsuit against FINMA in the Court of St. Gallen.

Conclusion and Valuation

For its part, the Swiss supervisory authority, the FINMA, has returned to defend its work in the rescue of Credit Suisse. Marlene Amstad, board president underlined that "the vast majority of regulated institutions have generally proven to be adequate and effective". UBS is also considering delaying the Q2 results publication. The Swiss giant should present the results on July 25th; however, according to the FT, could try to postpone its quarterly figures until August-end. Here at the Lab, back when no one would have imagined, we published an analysis called We Told You So . We could never have imagined that Credit Suisse could end up like this, and today, we still positively view UBS. We didn't change our estimates (yet) but is still a buy .

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