UBS Achieves Profitability Following Credit Suisse Acquisition

UBS has announced its first quarterly profit since acquiring struggling competitor Credit Suisse, showing a significant improvement from six months of losses following the completion of the takeover deal.

The Swiss bank's stocks rose by 10% in Zurich on Tuesday after revealing a net profit of $1.8 billion for the first quarter of 2024, marking a 71% rise from the previous year. In contrast, the losses incurred from June to December 2023 amounted to nearly $1.1 billion.

CEO Sergio Ermotti expressed that the recent performance showcased the bank's strength and its capability to make significant progress on integration plans.

According to analyst Johann Scholtz from Morningstar, the results exceeded expectations and were much stronger than anticipated.

"The market was initially worried that the Credit Suisse merger might cause a drop in revenue, leaving cost reduction as the only option to boost earnings," he mentioned in a note.

However, revenue actually increased by 45% compared to last year, reaching $12.7 billion. UBS also saw a net inflow of $27 billion into its global wealth management business, the bank's largest division, in the first quarter. Additionally, the bank achieved cost savings of $1 billion, on top of the $4 billion in cost cuts made last year.

The logo of Swiss bank UBS is seen at the company's headquarters in Zurich, Switzerland February 10, 2015. REUTERS/Arnd Wiegmann/File Photo

The logo of Swiss bank UBS is seen at the company's headquarters in Zurich, Switzerland February 10, 2015. REUTERS/Arnd Wiegmann/File Photo

Arnd Wiegmann/Reuters

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Switzerland has expressed concerns that UBS may require additional funds, causing frustration for the bank. In February, UBS committed to reducing costs by $13 billion by 2026, which involves cutting numerous jobs to ensure the success of the significant deal.

The bank acquired its rival across town in March last year as part of a government-led rescue to avoid a worldwide financial crisis. The purchase was finalized in June, but it is anticipated that the integration process will require at least an additional two years.

Ermotti, who returned for a second term as CEO to manage the urgent acquisition, has stated before that this year is crucial for the merger. This involves combining operations in over 50 countries.

On Tuesday, Ermotti mentioned that UBS is making good progress in reaching important integration goals this year. This includes combining the operations of the two banks in Switzerland by the third quarter.

There is also a focus on managing regulatory risk to ensure a smooth transition during the merger.

Shares in UBS have seen a significant increase of over 54% in the past year. However, there was a recent drop in share prices due to a selloff. This occurred after Switzerland’s finance ministry suggested that UBS should increase the amount of cash and other liquid assets it holds to better prepare for potential losses.

Swiss finance minister Karin Keller-Suter mentioned that these new capital requirements could be as high as 25 billion Swiss francs ($27.5 billion).

UBS has expressed significant concerns regarding the proposals. On Tuesday, Ermotti emphasized the bank's belief that it was not a lack of capital that led to Credit Suisse requiring a rescue.

During a call with analysts, he stated, "While some changes to the regulatory framework may be needed, the conversation about capital should be grounded in facts. This includes providing a complete and transparent explanation of the unique failures at Credit Suisse."

UBS has been increasing its capital buffers by nearly $20 billion due to the acquisition of Credit Suisse. This is mainly because of the bank's larger market share and balance sheet size.

The CEO mentioned that they will be sharing their opinions with the appropriate authorities. He also expressed optimism for a fair and reasonable decision.

Editor's P/S:

UBS's strong performance in the first quarter of 2024 is a testament to the bank's ability to integrate Credit Suisse successfully. The 71% increase in net profit and 45% rise in revenue demonstrate the effectiveness of UBS's strategy to focus on cost reduction and revenue growth. The bank's ongoing progress in combining operations and managing regulatory risk bodes well for the future.

However, UBS's concerns about Switzerland's proposed new capital requirements are valid. The bank has already increased its capital buffers significantly due to the Credit Suisse acquisition, and additional requirements could hinder its ability to lend and invest. It is important for regulators to consider the specific circumstances of Credit Suisse's failure and ensure that any new rules are proportionate and do not unfairly burden other banks.