Credit Suisse's First Earnings Report After Finalizing the Acquisition: Net Profit in the Second Quarter Reaches the Highest in Banking History | Earnings Report Insights

On Thursday, August 31st, UBS, Switzerland's largest bank, released its first earnings report since acquiring its competitor, Credit Suisse. The report was delayed by five weeks in order to develop an integration plan for Credit Suisse, as UBS has been dealing with legal and regulatory disputes.

Thanks to an "accounting boost" of $28.9 billion in negative goodwill, UBS achieved a record-breaking net profit of $28.8 billion in the second quarter of this year. This surpasses the $14.3 billion profit reported by JPMorgan Chase, the largest bank in the United States, in the first quarter of 2021, making it the highest quarterly profit in the history of European and American banking.

The negative goodwill actually contributed to the increase in accounting income, reflecting the difference between the fair value of the acquired assets of Credit Suisse and the discounted acquisition price of $3 billion Swiss francs (approximately $3.4 billion) paid by UBS. After deducting the boost from negative goodwill, integration-related expenses, and acquisition costs, UBS's basic pre-tax profit for the second quarter was $1.1 billion.

Some analysts had expected UBS to benefit from negative goodwill by an even higher amount, up to $33 billion. However, Credit Suisse reported losses this year, and UBS also wrote down some assets of Credit Suisse that did not align with its own strategic development. Nevertheless, UBS's net profit has doubled compared to the market's expectation of $12.8 billion, and its European stocks surged more than 7%, reaching the highest level since the 2008 financial crisis. The stocks have risen nearly 40% this year.

At the same time as UBS released its second-quarter report, Credit Suisse, now a subsidiary of UBS, also published its final earnings report as an independent entity. It reported a pre-tax loss of 9.3 billion Swiss francs in the second quarter of this year, with net asset outflows of 39.2 billion Swiss francs, although the outflow rate has slowed down. The size of managed assets decreased by 3% due to significant outflows of clients and employees, indicating that the confidence, which was on the verge of collapse before the crisis in March, has not yet been restored.

UBS announced that it will fully integrate Credit Suisse's Swiss banking business starting from next year, rather than pursuing the speculated option of spinning it off as an independent entity or listing it separately, which may cause controversy. UBS plans to reduce its workforce by 1,000 in Switzerland due to overlapping domestic operations. It aims to complete the "comprehensive integration" of all Credit Suisse businesses by 2026, which used to be a core source of profit for Credit Suisse. The goal is to save at least $10 billion in total costs, and it may involve further workforce reductions of 2,000 in Switzerland, with the number of international job cuts unknown.

Previously, there were reports that UBS's acquisition of Credit Suisse increased its workforce to about 120,000, and the bank plans to eventually reduce it by about 30%. Analysts believe that UBS will use different methods of downsizing to minimize public backlash in Switzerland, but it is clearly seen as positive by investors. UBS CEO Ralph Hamers stated that the majority of the 3,000 job cuts will come from retirements or natural attrition rather than direct replacements. In addition, analysts believe that UBS's flagship Swiss banking business is the only division that can generate positive returns in 2022. This acquisition has become a political and public opinion focus, as it is the first merger of two globally systemically important financial institutions. Moreover, UBS's 167-year-old brand image may gradually be phased out.

There were speculations that UBS would spin off and independently list UBS's Swiss banking business through an IPO. However, earlier this month, UBS chose to proactively terminate over 100 billion Swiss francs of liquidity and loss protection support from the Swiss government and central bank. This move is aimed at integrating UBS's domestic banking business rather than splitting it. UBS's CEO also stated that this is the best outcome for UBS, stakeholders, and the Swiss economy.

UBS's CET1 ratio improves in Q2, global wealth management attracts $16 billion in funds, UBS's net asset outflows improve

The financial report also shows that UBS's Common Equity Tier 1 (CET1) ratio, which measures the bank's liquidity and solvency, increased from 14.2% in the same period last year to 14.4%, surpassing the 13.9% in the first quarter of this year. The tangible return on equity, excluding goodwill, integration-related expenses, and acquisition costs, was 4.3%. The CET1 leverage ratio was 4.8%, compared to 4.4% a year ago.

In the quarter, the combined group saw a net inflow of $23 billion in deposits, of which $18 billion came from UBS's wealth management and Swiss banking divisions. UBS's flagship business, the global wealth management division, attracted a net inflow of $16 billion in new funds, reaching the highest level of net inflows in the second quarter in over a decade. However, this is lower than the net inflow of $28 billion in the first quarter of this year.

UBS emphasizes that the large-scale net outflows of assets and deposits that Credit Suisse experienced last year have finally begun to reverse, with net asset outflows slowing down in the second quarter and turning positive after the completion of the acquisition in June. The bank has seen a recovery in client activity and expects new asset inflows to continue. UBS will strive to retain as many Credit Suisse clients as possible to ensure the long-term effectiveness of the large-scale merger.

The CEO of UBS stated that UBS and Credit Suisse have seen an increase in deposit inflows in the second and third quarters so far, which demonstrates customer loyalty:

"Credit Suisse lost approximately $200 billion during the difficult period in 2022 and 2023. Now we see some of that money returning, and our goal is to recover as much as possible, although it is not easy."

The latest performance also shows that UBS's wealth management profit decreased by 4% year-on-year in the second quarter, while retail and corporate banking profit increased by 54%. Asset management profit decreased by 91%, mainly due to the sale of a stake in a fund manager last year, and investment banking profit decreased by 66%.

UBS announced that it will close two-thirds of Credit Suisse's investment banking business, including almost all trading activities, in order to exit businesses that do not align with its existing strategy. Credit Suisse's underperforming wealth management and asset management divisions will also be further reduced. Credit Suisse CEO stated in an interview with multiple media outlets:

"There is no room for nostalgia now. We are executing a comprehensive integration strategy for Credit Suisse's business and making excellent progress."

During the integration of Credit Suisse's Swiss banking business, clients will continue to receive the high-quality service they expect and benefit from the enhanced products, expertise, and global influence of the merged group. Our stronger capital base will maintain the same level of loan exposure after the merger while maintaining risk discipline.

The substantial negative goodwill is the capital required to support $240 billion of risk-weighted assets and the financial resources needed for Credit Suisse's deep restructuring. Credit Suisse has outstanding talent, clients, and product capabilities, but its business model is no longer sustainable and requires restructuring."

Wall Street is optimistic about the stability of Credit Suisse's business after acquiring Credit Suisse, but cautious about the complexity and challenges of the comprehensive integration process.

Analysts generally believe that the "stability of the business is faster than expected" after Credit Suisse's acquisition of Credit Suisse. Bruno Verstraete, a partner at asset management firm Lakefield Partners, described Credit Suisse's second-quarter net profit as a "rare historic figure" and said that the good news indicates that "stabilization is coming, and the situation seems to be under control, reducing market concerns about existing and potential risks."

Alison Williams, Senior Industry Analyst at Bloomberg Intelligence, believes that Credit Suisse's earnings report has two key data points that indicate its successful acquisition of Credit Suisse: the increasingly stable wealth management division and the decision to retain and integrate Credit Suisse's domestic banking business, which will allow Credit Suisse to leverage its expanding scale and competitive leadership position in the Swiss domestic market.

Deutsche Bank expressed optimism that Credit Suisse's core business does not seem to be affected by the acquisition of Credit Suisse, and solid progress has been made in dealing with Credit Suisse's non-core business, resulting in a strong and better-than-expected CET1 ratio in the second quarter of this year:

"Although the group is still in a (complex and busy) construction site state during the short term of integrating Credit Suisse's business, a series of positive financial reports and announcements should bring confidence to the mid-term bullish scenario. We maintain a buy rating on Credit Suisse."

Currently, mainstream investment banks such as JPMorgan Chase and Citigroup also hold overweight/buy ratings on Credit Suisse, while RBC Capital Markets and Jefferies have a hold rating. Italian investment bank Mediobanca, among others, has a sell rating.

Vontobel Holding AG, a Swiss private banking and investment management group with a buy rating, emphasized that Credit Suisse clearly faces challenging tasks such as restructuring Swiss Credit, integrating key employees, retaining clients and migrating them to its internal systems, and resolving historical litigation issues of Swiss Credit. "This will require a significant amount of time and management attention."