UBS said it expects to make a $35bn accounting gain as a result of its state-brokered rescue of Credit Suisse, lower than some had forecast, and separately disclosed $17bn of asset writedowns and litigation provisions.
In a US regulatory filing on Wednesday, the Swiss lender detailed, for the first time, its early estimates for the financial impact of the merger — the largest bank deal since the financial crisis that is expected to take as long as four years to finalise due to its complexity.
UBS said it should make a $34.8bn accounting gain on the transaction, generated because it acquired its rival for a fraction of the book value of its assets. The so-called “negative goodwill” is calculated by subtracting the $3.5bn acquisition price from the roughly $38bn fair value of the net assets.
This is lower than the theoretical $57bn of profit it could have booked because of a host of factors including changes to the fair market value of assets, pension liabilities and adjustments made because the two lenders used different accounting standards.
The lower than expected equity and capital benefits disclosed “nullifies elements of the bull case in our view and lends further support to our more cautious stance on UBS”, said KBW analyst Thomas Hallett. “With many unknowns and potential risks to work through, we believe investors are better served sitting on the sidelines until visibility improves.”
“The release is a reminder of how much accounting noise will be present for the majority of the next decade at UBS — the messiness will last many years,” he added.
Nevertheless, the negative goodwill will provide a paper profit for UBS that can be used to cushion the various losses and integration costs of the deal. Controversially, the Swiss government and regulator Finma also paved the way for the bank to write off $17.1bn of additional tier one bonds — debt instruments that can convert into equity — which has provoked investor lawsuits.
In the filing, UBS said it will mark down Credit Suisse’s assets by $13bn, set aside $4bn to cover regulatory and litigation matters and flagged that there will be an additional restructuring charge after the transaction closes.
The main assets to be written down are Swiss mortgages and trading assets, particularly from those investment banking businesses that UBS plans to exit.
Anke Reingen, an analyst at RBC Capital Markets, said her calculations had anticipated a higher common equity tier 1 level of 15.4 per cent versus the 14.2 per cent that UBS disclosed on Wednesday.
The stock was little changed after the release.
After years of scandal and losses, the Swiss establishment stepped in to make UBS rescue its ailing rival in March following hundreds of billions of client withdrawals that threatened to topple Credit Suisse. The state provided more than SFr250bn ($278bn) of public funds and guaranteed SFr5bn in losses to sweeten the deal for UBS.
The filing revealed other details about the merger. UBS saved roughly $400mn by cancelling a Credit Suisse staff bonus scheme that was linked to the AT1 bonds. It has also banned Credit Suisse from issuing new credit lines of more than SFr100mn to investment grade companies and SFr50mn for junk borrowers.
UBS expects to make a gain of $1bn on Credit Suisse’s global real estate portfolio, but that will be more than offset by a $2bn loss on its capitalised software assets.
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