Of all the possible deals involving European investment banks, a combination of UBS and Credit Suisse has long been viewed by many observers as one of the least likely to happen. The regulatory hurdles were insurmountable they said.
So it was no surprise that reports that UBS chairman Axel Weber had been pondering such a merger were met with a shrug by investors. On the day the news surfaced the share prices ended little changed.
Investors may be dismissing it a bit too quickly, however. Although the hurdles remain formidable the world has changed in a number of ways over the last year that make European bank deals, including this one, more possible.
One of those changes is the challenge facing Weber who, according to the report is the driving force behind the idea.
Having been applauded for its radical shrinking of its investment bank after the global financial crisis UBS has stalled over the last couple of years and its share price sagged. Weber, who is due to step down in 2022, needs to do something to ensure his legacy. And he doesn’t have much time left.
Before the pandemic, Weber argued that the new low interest rate environment in Europe, which could last for five or ten years, had radically changed the outlook for European banks. The coronavirus has made that outlook gloomier still.
In pure business terms, some bankers think that combining UBS and Credit Suisse would make a good deal of sense. They argue that the pair’s big wealth management operations could be merged without too serious a loss of customers and that massive cost cuts could be made by putting together the European investment banking operations without too much damage to the business. The damage to jobs would, of course, be very serious with reports suggesting losses of up to 15,000, mostly in Europe.
In the US, Credit Suisse has a much stronger investment banking presence which would appeal to Weber who believes UBS needs to become more American.
Another thing that has changed is the attitude of European regulators who have become much more supportive of the idea of European bank mergers, amid increasing concerns about their chronic lack of profitability.
It has been assumed that the Swiss regulators and government would be against a merger between UBS and Credit Suisse because of the potential cost of bailing out the combined bank in a crisis, not to mention the very high share it would have of the domestic Swiss market. But Weber is reported to have run the idea by the Swiss finance ministry. Perhaps he is suggesting that the scale of the merged investment bank would be much less than the sum of the parts.
Nonetheless, the Swiss would surely put the combined bank under an even tighter capital regime which is already the toughest in the world. Bankers at both institutions have often dreamed of ways of escaping from the suffocating clutches of the Swiss regulators so doubling up in Switzerland might look an odd move.
The talk of an all-Swiss merger inevitably raises the question of whether either or both of the banks could do a better deal elsewhere.
Some bankers have long said the most compelling combination would be for Morgan Stanley to buy Credit Suisse. Credit Suisse would give Morgan Stanley a much stronger investment bank in Asia and more importantly would greatly strengthen its wealth management business, making it the clear global number two behind UBS. Financially, it gets ever more attractive. Morgan Stanley is now worth more than three times Credit Suisse and its shares trade at a premium to book value while Credit Suisse’s have sunk to a discount of nearly 50%.
And how about Goldman Sachs and UBS? If Goldman is serious about a pivot from investment banking to wealth management it could hardly do better, though it would be much more challenging financially.
However convincing these deals look on paper, most observers are sceptical that anything will happen soon. As one banker says about banking consolidation in Europe: “It is still much like teenage sex. There is a lot of talk and very little action.”
But that implies it is not a question of if, only of when and who.
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