UBS Group AG is gearing up for an estimated $34.8 billion gain as a result of its emergency takeover of Credit Suisse Group AG, while warning it faces billions in potential legal and regulatory costs from the rescue of its stricken former rival.
The Swiss bank stands to benefit from the combined firms’ negative goodwill, based on a first assessment it has made on data as of the end of 2022, according to a regulatory filing posted overnight in Switzerland. UBS is also estimating that litigation, regulatory matters and related liabilities may take a bite of as much as $4 billion out of capital over 12 months.
The figures are based on the bank’s best estimates now, and as further analyses are performed the figure is likely to change, UBS said.
Bloomberg had previously reported that the bank could make a gain of as much as 51 billion Swiss francs ($56.8 billion) from the negative goodwill, calculated on the value of Credit Suisse assets at the end of March.
UBS agreed to take over Credit Suisse this year in an emergency sale backed by the Swiss government, amid fears that the smaller troubled competitor was hurtling toward bankruptcy. Analysts have pointed out that Credit Suisse’s local business, the Swiss Universal Bank, is probably worth multiple times what UBS paid for the company.
UBS shares fell 0.8% after the open in Zurich on Wednesday, trading at 17.035 Swiss francs as of 9:06 a.m..
Still, if UBS reports a windfall from negative goodwill, many investors will view it as an accounting quirk rather than a sign of strength of the underlying business. And executives, aware that a paper windfall could prove unpopular in Switzerland, have been quick to point out the risks they’re taking on in an integration that may take several years.
The accounting gain stands to be among the biggest ever reported by a bank in a single quarter, potentially easily surpassing the previous benchmark. JPMorgan Chase & Co.’s $14.3 billion profit in the first quarter of 2021 is the modern record for US and European lenders.
UBS is benefiting from a $9 billion state-backed guarantee for a certain portion of losses that it may incur on Credit Suisse positions. Yet UBS Chief Executive Officer Sergio Ermotti said last week that it was “exceptionally unlikely” that the government will end up taking a financial hit.
UBS staff are currently deeply involved in a process of due diligence into its acquired rival, with the deal set to close in the coming weeks.
Unlike in more standard acquisitions, UBS was unable to conduct a months-long review of the bank’s books. UBS has sent in a so-called clean team to assess its former rivals’ client rosters and talent, as well as which business lines should be earmarked for a wind-down unit, people with knowledge of the matter have said.
Credit Suisse had a long list of legal entanglements that may end up costing UBS. Unresolved cases span an embarrassing criminal conviction for facilitating a Bulgarian cocaine trafficker’s money laundering to a half-a-billion dollar settlement in a bribery scandal related to a tuna fishing fleet in Mozambique.
(Updates with shares, further context throughout)
