Could UBS’ forced acquisition of Credit Suisse become jackpot of the decade?
UBS reports its first quarterly result of the combined group after its forced acquisition of Swiss competitor Credit Suisse back in March, which was completed on 12 June. The new CEO Sergio Ermotti is on a mission to quickly integrate Credit Suisse into the group and harvest the synergies expected from the merger which will include selling certain Credit Suisse assets and close non-core businesses.
Analysts are expected net revenue of $8.5bn down 9% from a year ago and adjusted net income of $1.32bn down 29% from a year ago. Investors are betting that Ermotti will deliver more details on the vision for the new Swiss bank and that targets for profitability will beat those of analysts. The estimated FY25 net income is only $8.4bn, which is more or less unchanged from the FY21 results, and seems too conservative given the reputation of Ermotti, but also the cost cutting potential there exists in the new combined business. Investors seem to agree wanting to be part of what could become a powerhouse in global wealth management, which is a high margin and predictable business, sending UBS shares up by 33% this year and 15% alone since 10 August when UBS ended the Swiss government loss protection seen by investors as a sign of strength and the improving outlook.
UBS is currently valued around 0.9x tangible net asset value expected for FY23, which is close the long-term average ending in December 2022. With higher interest rates, strategic benefits in wealth management post the merger, and potential cost savings, we believe investors may be willing to pay a premium over time on tangible book value, but it all comes down to cost execution by Ermotti and the management team. If UBS executes this merger well, then it may turn out to be jackpot of decade for UBS shareholders. First step in that long journey is tomorrow’s FY23 Q2 results.