The New Banking Behemoths: UBS and Credit Suisse merger

October 8, 2020

3 min read

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What's going on here?

UBS and Credit Suisse are reportedly considering the viability of a merger that would create one of the largest banks in the EU, “overshadow[ing] everything that has existed in the financial centre” before it.

What does this mean?

Speculation of a merger between the two largest Swiss banks came after a post on the finance blog, Inside Plaradeplatz, which stated that the UBS chairman, Axel Weber had brought in external management consultants to map out the possibility of a deal with Credit Suisse. This project, code-named Signal, could result in an agreement as early as next year.    

Whilst UBS and Credit Suisse have said that they “don’t comment on market rumours and speculations”, other sources have also claimed that the project is still in the ideation phase with no official talks taking place just yet. However, the initial report seems to contradict these sentiments by indicating that the Swiss Finance Minister, Ueli Maurer, and Federal Financial Market Supervisory Authority (FFMSA) have both been approached for consideration.    

A combined Swiss entity would create a so-called “banking behemoth” that would eclipse all financial bodies that have come before in Europe. As leaders in the global investment banking world with combined assets of around €4.3 trillion ($7 trillion), it is speculated that the merger could rival Wall Street stalwarts. 

From a business standpoint, the merger makes perfect sense. In terms of investment banking, a deal could be complimentary for their operations; UBS better suited towards equities trading, and Credit Suisse more skilled in credit and fixed income. The latter also has a stronger investment banking presence across the pond which would surely benefit UBS, whom Weber believes needs to be “more American”. 

In short, the cost savings that the banks could make from merging their investment activities could potentially outweigh the loss of wealth management customers that would move assets elsewhere to better diversify their risk.

What's the big picture effect?

Talks of a merger between the banks have circulated for years but they have never moved past initial discussions due to antitrust concerns, which explains the lack of enthusiasm from investors in this instance. 

Regulatory hurdles are believed to be the biggest barrier for the merger. Switzerland imposed rigorous capital and liquidity requirements for banking institutions after coming to the rescue of UBS during the 2012 financial crisis. With the country’s need for banks to be “too-big-to-fail”, in order to mitigate any repeat risk to the economy, it is suggested that any cost-savings that could be made would be outweighed by the additional regulatory requirements that would need to complied with for the merger to go ahead. However, the need to survive in the post-COVID world is acting as a catalyst for change in attitudes towards banking consolidation. 

European regulators are now considering giving the green-light to similar deals across the banking industry to enable lenders to achieve economies of scale. For example, CaixaBank and Bankia in Spain, and Intesa Sanpaolo and Unione di Banche Italiane in Italy. Therefore, it may not be so cut and dry in the case of UBS and Credit Suisse.

It can be argued that this change is essential. Low interest rates that could persist for the next 5 to 10 years and the impact that the pandemic is having on the global economy are giving greater legitimacy to the idea of consolidation in the banking world as a means to weather the current storm. However, it is worth noting that whilst superficially mergers may appear as a solution to an industry-wide problem, there are other consequences to the tune of around 15,000 jobs in the context of UBS and Credit Suisse, that will also be applicable to similar deals to a relative extent.

Whatever the outcome to the titular negotiations, it is more than likely that we will see mergers and acquisitions becoming ubiquitous in the banking industry over the coming years.

Report written by Justin Griffin

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