UBS Doesn’t Need Government Cover to Make a Killing on Credit Suisse

The move to give up a loss-protection agreement suggests that UBS hasn’t found too many skeletons in Credit Suisse’s books

By guest author Jon Sindreu from the Wall Street Journal.

CS – UBS 2 UBS said it would no longer rely on Swiss government assistance tied to its emergency takeover of Credit Suisse in March. PHOTO: FABRICE COFFRINI/AFP
UBS UBS 4.11 % increase; green up pointing triangle may be implicitly starting to admit that buying Credit Suisse was the deal of the decade.
On Friday, the Zürich-headquartered bank said it was giving up the loss-protection agreement it negotiated with the Swiss government when it acquired troubled rival Credit Suisse. Under the deal, the public purse would have covered nine billion Swiss francs of losses, equivalent to about USD 10.3 billion, on Credit Suisse’s portfolio of noncore assets as long as UBS picked up the first five billion francs. UBS also terminated a liquidity backstop it had with the Swiss National Bank and paid back a loan Credit Suisse had taken out with the central bank.
You might assume investors would be displeased by UBS giving up free insurance for no apparent gain. Yet its shares jumped almost 5 % on the news. Markets are right to be celebrating. One reason is political. The takeover of Credit Suisse, which was shepherded by Swiss authorities back in March during a mini banking crisis, has been unpopular. Lawmakers rebuked it and launched a parliamentary inquiry.
This week has already brought one reminder that this kind of public backlash can matter a lot. On Tuesday, Italian bank stocks were battered after Rome unveiled a tax on lenders’ excess net interest income. Though officials later watered down the proposals, the lesson is clear: As banks have come to be regarded as public utilities with implicit government backstops—as opposed to the free-market gamblers of the pre-2008 era—governments feel entitled to intervene whenever they feel these companies are making too much money.

In UBS’s case, one political question concerns its ambition to keep Credit Suisse’s domestic bank rather than sell it off. A merger of the two operations has big antitrust implications and would imply thousands of job cuts. Getting rid of government support could smooth the path for the company as it looks for domestic deal synergies.
The other reason investors are happy is more nakedly financial: UBS’s move sends a signal that it hasn’t found too many skeletons in the Credit Suisse closet.
When the Credit Suisse acquisition closed in June, UBS paid just $3.6 billion to acquire assets with an estimated tangible value of $38 billion. The lowball price was predicated on the notion that the deal was rushed and there were many unknowns about the bank’s books.
As UBS got to comb through the business in detail, two outcomes were possible: Either nasty surprises would emerge, justifying the need for the government guarantee, or it would become clear that it got a copious free lunch by buying Credit Suisse. In the latter case, retaining explicit government support would only increase the threat that officials might decide to claw back some of the windfall.
While it is still early days, the more favorable scenario seems to be playing out. “After reviewing all assets covered by the LPA since the closing in June and taking the appropriate fair value adjustments, UBS has concluded that the LPA is no longer required,” UBS said. This is the most the company has said on the subject since June, and bodes well for second-quarter results due on Aug. 31.
Sometimes, giving up a safety net is a sure sign of confidence.
Swiss bank UBS agreed to take over its longtime rival Credit Suisse as authorities seek to halt a dangerous decline in confidence in the global banking system. WSJ’s Patricia Kowsmann explains how the deal unfolded and what might come next. Photo: Hannah McKay/Reuters