UBS promises to downsize ‘tricky’ Credit Suisse investment bank

(Bloomberg) —

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Colm Kelleher, chairman of UBS Group AG, said he would be taking down the investment bank of Credit Suisse Group AG, stemming a source of losses in recent years and potentially ending plans to spin off parts of the unit under the CS First Boston brand .

“Let me be very specific: UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture,” Kelleher said at a press conference announcing the transaction on Sunday. “We will make many of the tricky deals we take on risk-free.”

UBS’s acquisition of Credit Suisse, announced on Sunday, creates significant overlaps in the new combined bank, not least in the entity that took a multi-billion dollar blow from Archegos Capital Management’s 2021 explosion. The combined investment banks of UBS and Credit Suisse will hold no more than 25% of the entire company’s risk-weighted assets over time, Kelleher said.

UBS is acquiring a portfolio of “difficult to assess” illiquid assets, including long-dated derivatives and swaps, for which the bank has negotiated a loss guarantee from the Swiss government. Given the speed of the deal, UBS was unable to conduct adequate due diligence on the portfolio, although Kelleher said there was no reason Credit Suisse failed to label it correctly. The bank is expected to absorb initial losses of up to 5 billion francs ($5.4 billion) as the portfolio winds down, and the government would absorb another 9 billion francs in potential losses.

Small deal

A key element of Credit Suisse’s strategic shift unveiled in October was the spin-off of parts of the investment bank under the CS First Boston brand, to be led by former dealmaker Michael Klein. The companies housed in the unit became a sticking point in talks over the weekend over the merger agreement.

Read more: Credit Suisse’s first Boston plan is cast in doubt by crisis talks

Kelleher emphasized that UBS has its own investment banking unit, but didn’t go directly into the spin-off plans. Klein will miss a big payday as he resigned from the board of directors and recently sold his boutique investment firm to the bank in a $210 million deal that was pending before the takeover.

UBS plans to continue its own strategy of a smaller capital-poor investment bank and therefore be able to use Credit Suisse’s investment bank to strengthen its global banking operations and manage the rest.

(Updates with more details throughout)

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