UBS’s Ermotti may have sealed the deal of the decade with the Credit Suisse bailout

After an intense weekend of negotiations in March 2023, the Swiss banking giant UBS agreed to buy its competitor Credit Suisse.

Despite the attractive purchase price of $3.2 billion, investors were concerned about whether UBS would be able to turn around Credit Suisse’s investment banking business – a longtime source of trouble. UBS had also become one of the biggest banks in Europe, raising political and regulatory fears.

At the time, investors were “very concerned” about the complexity of the deal and whether UBS would make it work, Bruno Verstraete, founder of Lakefield Wealth Management, told CNBC via email.

“When a healthy person sleeps next to someone with severe flu, they are likely to catch it too,” he said.

The takeover was so complicated that UBS decided to change leadership and bring former CEO Sergio Ermotti back at the bank’s helm to oversee the merger.

“Given the market conditions, political dynamics and time constraints under which the deal was executed, investors were well aware of the significant risks associated with acquiring unknown liabilities,” Verstraete added.

Now, 18 months later, that sentiment is changing, and many agree this is the deal of the decade.

“The merger with Credit Suisse is currently proceeding on planned milestones and timelines, and UBS’s leadership under CEO Sergio Ermotti was absolutely right to proceed ambitiously,” Beat Wittmann, president of Porta Advisors, told CNBC via email.

UBS completed the merger of the parent companies in May and then completed the transition to a single US intermediary in June. In July, it fully merged the Swiss entities of Credit Suisse and UBS. The whole process is expected to be completed in 2026.

“The integration process is being conducted in a typically Swiss way — disciplined, realistic and seemingly on track. Calm and trust have been restored,” Verstraat said.

Dissipating concerns were also clear when UBS reported second-quarter results in August, with analysts shifting to focus on actual business performance rather than the details of the merger.

UBS‘ The announcement of faster progress on cost savings also pleased investors. The bank now expects to reach $7 billion in cost savings in 2024, or more than half of UBS’s $13 billion target for the duration of the merger process through 2026. The figures compare to a 2022 benchmark.

But Ermotti does not lift his feet.

“Let me repeat something you’ve heard me say before. We still have a lot of work ahead of us to address Credit Suisse’s structural lack of sustainable profitability,” he said in August after the results.

“While we are encouraged by the significant progress we have made across the group, the path to restoring profitability to pre-acquisition levels will not be linear,” Ermotti added.

One of the big sticking points is possible new capital requirements from the Swiss authorities.

Swiss Minister of Finance Karin Keller-Sutter told the country’s Tages-Anzeiger newspaper earlier this year that it was “plausible” that UBS would require an additional $15 billion to $25 billion in capital to address national concerns that the bank had become too big to handle. saved.

Clarity on these capital additions is expected to emerge in early 2025.

Therefore, some investors still need a little more convincing.

“The key indicator to watch for UBS’s fortunes is the share price and the capital market is showing a plain and simple ‘show me first’ attitude,” said Porta Advisors’ Wittmann.

UBS shares rallied in the wake of the deal in March 2023, but have since stabilized somewhat. They are up more than 21% over the past 12 months, but only 1% year-to-date.

For context, HSBC shares rose 11% year-over-year and 3% year-over-year, while Credit Agricole it is 19% higher in the last 12 months and 6.5% since the beginning of 2023.