The integration of Credit Suisse into UBS has garnered attention and speculation within the financial industry. Morningstar’s recent update sheds light on the potential benefits and challenges that lie ahead for UBS. The acquisition of substantial assets at a favorable cost presents a unique opportunity for UBS to strengthen its position in the market. While the integration of Credit Suisse brings promising prospects, Morningstar emphasizes that the success of this endeavor hinges on UBS undertaking a comprehensive and rigorous restructuring of the troubled aspects of Credit Suisse. This implies that UBS needs to address and resolve any underlying issues or weaknesses within the acquired entity. By conducting a substantial clean-up, UBS can enhance operational efficiency, mitigate risks, and align the integrated entities toward a shared strategic direction. The integration process requires meticulous planning, effective execution, and strong leadership from UBS to ensure a smooth transition. It involves harmonizing systems, processes, and cultures, while also leveraging the synergies and economies of scale that the combined entity can offer. UBS will need to navigate potential challenges such as overlapping operations, redundant functions, and cultural differences between the two organizations. However, if UBS successfully executes the integration and addresses the challenges head-on, it can unlock significant value from the acquisition. The synergies resulting from the combination of resources, expertise, and client base can strengthen UBS’s competitive position and expand its market reach. Furthermore, the integration of Credit Suisse provides UBS with an opportunity to broaden its product offerings, enhance its service capabilities, and tap into new markets. By capitalizing on the acquired assets, UBS can strengthen its wealth management, investment banking, and asset management divisions, driving growth and delivering greater value to its clients and shareholders. As the integration progresses, industry observers will closely monitor UBS’s strategic decisions, execution effectiveness, and overall performance. The successful integration of Credit Suisse has the potential to reshape the landscape of the banking industry, bolstering UBS’s position as a global financial powerhouse. The integration of Credit Suisse into UBS (UBSG) will mess up results considerably over the next three or four years, but apart from that, the acquisition does create opportunities for the future. After all, UBS got a lot of assets for a pittance and offers huge potential – at least if it keeps a big cleanse. Now that the dust has settled from UBS’s high-profile takeover of Credit Suisse, Morningstar updates its view on what is now Switzerland’s only remaining major financial institution. Equity analyst Johann Scholtz arrives at a Fair Value of CHF 27.50 per UBS share, up 22% from his previous calculation dating from the pre-Credit Suisse era. That makes UBS an undervalued share, as the current share price hovers around CHF 18.50. The new fair value estimate implies a value of around CHF 19 billion for the acquired Credit Suisse business. To put that into context: in March 2021, Credit Suisse’s market value was CHF 32 billion. In February 2023, just before the collapse, Credit Suisse was still valued at CHF 13 billion by the market. Tough task ahead The first thing UBS has to do now is not to aim for more revenue, but to cut costs through integration. It needs to drastically cut its loss-making, volatile and capital-hungry investment banking business while also restoring the profitability of Credit Suisse’s wealth management business, which is potentially healthy business. Although UBS, with its scale, is in a much better position to do this than Credit Suisse ever could have done independently, it will be a tough job. Analyst Scholz estimates that Credit Suisse’s legacy business will shrink 16% cumulatively over the next five years, mainly due to winding down Credit Suisse’s investment banking business. Most of the $8 billion in targeted cost savings will be realised from that process. Wealth management promises more potential and that could already contribute 16% to group revenue by 2023 and Scholtz expects it to grow 4% a year over the next 5 years. That adds to UBS’ own wealth management business, which is seeing continued inflows of clients and assets in that arm. Looking further into the future, Scholtz expects modest revenue growth of 1% a year and a 2% average annual decline in operating expenses over the next five years. Most of that will come from streamlining Credit Suisse’s former cost base. That will result in estimated earnings per share of $3.92 in 2027. When the integration is complete by 2027, the consolidated wealth management and asset management business will be even more dominant than UBS was as a standalone company. This business will account for 63% of group profits, Scholtz projects. He says the acquisition will “contribute strongly to profitability” for UBS in the longer term. First, UBS acquired talented staff, good client relationships and a significant asset base at a bargain price, Scholtz says. Secondly, Credit Suisse’s wealth management and asset management business has historically been a profitable, high-quality business. In the new era now under way, the concerns in the market that led to Credit Suisse’s demise are likely to dissipate. For instance, concerns about Credit Suisse’s solvency caused funding costs to skyrocket before the acquisition, but the lower funding costs UBS now has offer more favourable conditions. If the integration develops successfully, Scholtz says there will soon be room for UBS to gradually increase its dividend payout. For 2023, he expects a dividend of $0.61 per share and by 2027, he sees room to resume the share buyback programme of $15 billion, being 20% of the current market value. However, external issues could still cause problems. As UBS is now the only remaining financial giant in Switzerland, this could lead to public outcry against such a momopoly, which is why UBS might well decide to split off its domestic Swiss banking operations into a separate company, Scholtz argues. The combined domestic operations of Credit Suisse and UBS contribute about 27% to group profits. Taking all this into account, Scholtz assigns UBS a Narrow Moat rating, mainly based on switching costs. In banking and wealth management, these switching costs are usually implicit; it is a customer’s valued relationship with his adviser who knows everything about his customer and provides service to unburden them. Such a relationship took years and sometimes even generations. In recent years, both UBS and Credit Suisse have increasingly focused on so-called high-net-worth individuals, very high-net-worth clients who demand a lot but also bring in a lot of wealth and loyalty to advisers if the bank does its job well. Such valuable relationships pay off, as evidenced by the fact that Credit Suisse’s wealth management business continued to generate income even as concerns began to mount and failed risk management raised doubts about the bank. That is a glimmer of hope in a fresh marriage that will go through many peaks and valleys.
