Maintaining revenue growth will be a key challenge for UBS Group AG as it incorporates Credit Suisse Group AG's wealth management businesses.
The government-brokered merger of Switzerland's two largest banks closed June 12, creating a group with roughly $5 trillion in invested assets across global wealth and asset management. With Credit Suisse, UBS expects to become the third-largest asset manager in Europe and the 11th largest in the world.
The merger will undoubtedly boost UBS' wealth management presence and competitive position across key markets, yet it may be several years before the benefits of the deal are reaped, analysts said. The asset outflows Credit Suisse suffered before the merger will weigh on the new group's earnings over the short term, they said.
"I have a lot of confidence that UBS will be able to extract the [targeted] cost savings, but the question is really, 'will they be able to hold onto the revenue in Credit Suisse's wealth management business?'" said Johann Scholtz, equity research analyst at Morningstar.
Scholtz forecasts Credit Suisse's wealth management revenue to drop 16% in 2023 driven by client outflows, with a rebound expected from 2024. UBS' own wealth management operations are expected to attract steady client inflows in the next few years.
Total revenue across all of Credit Suisse's legacy businesses is expected to decline 16% cumulatively over the next five years, which will drag revenue growth in the merged group down to 1% over the next five years, according to Scholtz's estimates.
Analysts expect Credit Suisse's merger with UBS to drive some clients to domestic and international competitors as they seek to diversify banking relationships.
Credit Suisse's flagship wealth management division booked losses for the last quarter of 2022 and the first quarter of 2023. Revenue and profits at the unit have been on the decline since the third quarter of 2021, while costs have been growing.
Profit pressure
Credit Suisse's core wealth management franchise took a hard blow due to the group's tarnished reputation in recent years, said Vitaline Yeterian, credit analyst and senior vice president in DBRS Morningstar's global financial institutions group.
"We see UBS' main challenge as restoring the underlying profitability of the Credit Suisse business," Yeterian said. DBRS Morningstar will continue to monitor Credit Suisse's wealth management franchise for signs of lasting damage, such as the absence of a sustainable recovery in assets under management, Yeterian said.
UBS' profitability will be under pressure for the short term, and any growth will be driven through cost savings rather than higher revenue for the foreseeable future, Scholz said.
The wealth management business inherently has a very high degree of operating leverage with a high cost-to-income ratio, Scholz said. The fixed cost base will increase with the integration of the Credit Suisse business, and there is not much chance of a major revenue boost from capital markets given the current uncertainty and volatility, he added.
The acquisition of Credit Suisse brings additional challenges for UBS at a time when market disruption remains elevated, Yeterian said. Yet the acquired businesses will strengthen UBS' franchise in global wealth management and are expected to eventually boost group performance, according to the analyst. UBS has a long history of operating in different geographies where it has built up relationships and expertise over time, particularly in the ultra-high net worth (UNHW) customer segment, he said.
UHNW clients account for about 40% of current invested assets in UBS' wealth management arm and that percentage is even greater at Credit Suisse, according to Scholz. The UHNW client base is stickier than other client groups as they value strong, long-term relationships with their banks, which bodes well for UBS, he said.
UBS Chairman Colm Kelleher said at a media conference May 24 that the bank has seen a slowdown in asset outflows since the merger with Credit Suisse was agreed. UBS did not comment when contacted by S&P Global Market Intelligence regarding potential client outflow.
Credit Suisse said in its first-quarter earnings report that it expects to book "a substantial loss" in its wealth management division in the second quarter of 2023 as a result of "significant net asset outflows" suffered during the first quarter of the year. The bank declined to comment when contacted by Market Intelligence.
Cost cuts
UBS will have to walk a tight rope on cost management in the next few years as it works toward its targeted $8 billion of cost savings by 2027, all while taking in considerable restructuring expenses related to Credit Suisse's integration.
Morningstar estimates total restructuring costs at $10 billion over the next four years, with the bulk of the charges expected to be taken in 2024. Zurcher Kantonalbank projects even higher restructuring charges of $11 billion, half of which it expects to be booked in 2023 and another 30% in 2024.
The $35 billion of negative goodwill UBS booked from the merger provides it with "a comfortable cushion to execute on the deal," Yeterian said. The group also has a CHF9 billion loss protection guarantee from the Swiss government in case it has to absorb losses of more than CHF5 billion amid the Credit Suisse revamp, the analyst noted.
Yet UBS may be hesitant to tap the government support as it could impair its ability to make shareholder payouts in the future, Scholtz noted. "The optics will be quite bad if you take government support in one year, and then two or three years down the line you actually go and do share buybacks," said Scholtz.
– Explore UBS Group AG's business profile and wealth management business's performance on Cap IQ Pro.
– Read more on how Credit Suisse's collapse highlighted deficiencies in banking supervision and how its investment bank offers UBS growth opportunities in US, Asia.
