Credit Suisse Extinction Hands UBS Mammoth Profits

Thanks to the bargain purchase of Credit Suisse, Swiss banking giant UBS posted bumper profits, and is now enjoying a 5% share uplift

Dow Jones 31 August, 2023 | 9:58AM
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Shares in UBS have jumped after the Swiss bank reported bumper profits for the second quarter and confirmed it would integrate Credit Suisse into its operations.

In a statement today, UBS reported second quarter net profit of $28.88 billion, taking into account nearly $29 billion in negative goodwill from the Credit Suisse acquisition, completed earlier this year. Analysts had originally projected net profits of $12.8 billion, according to an earlier poll by Reuters. 

At 0731 GMT, shares were trading 5.0% higher at CHF23.26 (£20.80), after gaining more than 7% earlier in the session.

The integration of Credit Suisse's Swiss bank was widely anticipated, and the move allows UBS to retain the crown jewel and consistent moneymaker of its former rival, according to analysts.

"We believe this is the best outcome," Citi analyst Andrew Coombs said in a note.

UBS also raised its cost-saving estimate as part of the deal to $10 billion, having previously targeted $8 billion, and said it was already seeing an improvement in client sentiment and momentum in transactions among wealth management clients.

Deposit flows were better than anticipated, with net new money in wealth management even turning positive in the current quarter to date, Coombs said.

The bank will give further updates with third-quarter results and a more extensive strategic update with fourth-quarter and full-year earnings, it said.

Morningstar analyst Johann Scholtz today issued a note on the UBS situation, saying he now had more confidence the Credit Suisse acquisition would not harm its new parent's profitability in the long term. 

"UBS booked a massive $ 29 billion profit before tax, but excluding the negative goodwill from the bargain purchase of Credit Suisse, pre-tax profit was a more modest $ 314 million," he said.

"The legacy UBS-only business performed well, although its investment banking business saw a sharp slowdown in revenue. Credit Suisse's business, even on a normalised basis, remained loss-making. Revenue for Credit Suisse declined by 38% compared to the first quarter of 2023, with its investment banking revenue collapsing completely.

"Wealth management revenue held up reasonably well, and we view the net client inflows recorded in the quarter as confirmation that UBS has managed to stabilise the ship and a major positive. The Swiss domestic business of Credit Suisse remained profitable with stable revenue. After much speculation, UBS announced it would retain Credit Suisse's domestic Swiss business rather than pursue a separate listing. The merged operations in Switzerland could deliver meaningful synergies over time, making this a positive development."

UBS is now trading at 0.9 times its book value, he added.

"Since we increased our fair value estimate in June to incorporate Credit Suisse, the share price of UBS has rallied by 21%, which leaves UBS trading at a 20% discount to our CHF 27.50/share fair value estimate," he said.

"UBS now trades at 0.9 times its tangible book value, while over the past decade, it traded at an average price-to-tangible book value multiple of 1.2. We now have greater confidence that the Credit Suisse integration will not harm UBS' long-term profitability. A discount to book value does not capture the underlying profitability of the consolidated entity."

With additional reporting by Morningstar

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