International Tax Panorama

UBS and Credit Suisse, the two biggest banks in Switzerland, are in takeover talks, referred as “the merger of the century”. 

The Swiss National Bank (SNB) and Switzerland’s financial regulator reportedly believe that the acquisition of investment bank Credit Suisse by UBS, Switzerland’s largest bank, is the “only option” to prevent a “collapse in confidence” in Credit Suisse.

Emergency measures by Switzerland Government: 

Switzerland is preparing to use “emergency measures” to accelerate the takeover by UBS of Credit Suisse, in an effort to finalize the acquisition before “markets open on Monday.”

It was noted that the emergency measures set in place would allow the deal to proceed without a shareholder vote, bypassing the usual Swiss regulations that require a “six-week” consultation period for shareholders “to consult on the acquisition.”

Will the acquisition of this size a cakewalk?

An acquisition of this size will be extremely complex.

First UBS would require public guarantees to cover legal costs and potential losses, according to a report by Bloomberg, citing anonymous sources.

There are material risks as Credit Suisse may have various hidden skeletons in the closet. These may involve conduct or legal costs that may be multi-billion and thus future charges could be both distracting and costly. At the end of 2022, CS disclosed ~$1.3 billion of potential fines and legal costs with an indication of additional charges to be provided for in the future.

On the other hand UBS would have no interest in taking on the investment bank.

In October, Credit Suisse began a major restructuring project that plans to separate its investment banking from the rest of its activities, after a series of scandals. However, many investors consider the revamp to be too complex — and UBS might want to steer clear of taking over Credit Suisse’s problematic investment banking.

The unwinding of the Credit Suisse investment bank is likely to require a suitor to take on significant losses for an indeterminate length of time. Any would-be buyer will avoid it.

UBS would most likely take over the international wealth and asset management divisions which should be very complementary to its existing businesses. 

The Swiss regulators would have to coordinate closely with the U.S., UK, and other EU regulators to get this deal over the line and help to calm down systemic risks in the global banking markets. 

That’s why UBS AG is asking the Swiss government to cover about $6 billion in costs if it were to buy rival Credit Suisse.

Why is Credit Suisse under fire right now?

Credit Suisse shares tanked Wednesday after its biggest shareholder, Saudi National Bank, warned it wouldn’t be able to invest more cash without raising its stake above the regulatory limit of 10%.

But investors have been showing signs of losing faith in Credit Suisse long before the Saudi comments, and before the SVB collapse rattled the entire banking industry.

And Credit Suisse has faced a slew of other recent challenges. The bank revealed in its latest annual report that it found “material weaknesses” in its internal control over its financial reporting. Moreover, it delayed publishing that annual report after the Securities and Exchange Commission inquired about the lender’s revisions to cash flow statements dating back to 2019.

Credit Suisse also suffered a net loss of about $8 billion last year, as its net revenues tanked by more than a third.

Moreover, it has seen a sharp increase in outflows over the past few months, driving it to tap its “liquidity buffers” — liquid assets such as central-bank reserves and high-quality government debt.

Summary: 

UBS might not be overly interested in taking over the whole of Credit Suisse. There are too many risks involved.

UBS is certainly not interested in acquiring the liabilities in the legal structure as well as the investment bank. Unfortunately, it may not have a choice, if the Swiss regulators insist on this deal getting done. This may be seen as a “national service” as far as UBS is concerned. Its main prerogative would be to limit the downside risks involved in this by obtaining hard assurances on the risks it absorbed from Swiss and other regulators.

UBS may buy the rest and look to dispose of the investment bank over time.

Nonetheless, the medium and long-term winner here is clearly UBS. Wealth management is all about scale, and UBS is about to get materially larger.