UBS and Credit Suisse are candidates for acquisition

The alleged merger talks between UBS and Credit Suisse were met with coldness in the Swiss financial center. However, there are a few reasons why the topic is hot, such as finance professor Teodor Cocca in finews.ch writes.

The main question to ask yourself is how satisfied are the (major) shareholders of the two major banks with the performance of their shares. They are unlikely to be particularly happy with the share price developments in recent years.

After all, UBS shareholders can count on a generous dividend yield. Of course, there are many reasons why bank stocks have been unable to win favor with investors lately. But still: in international rankings based on various key figures, you can often no longer find a Swiss bank in the top 30 places.

On the contrary, this also means that some banks have made considerable progress in terms of growth, profitability or efficiency in recent years.

The need to act is indisputable

There is no denying a certain need for strategic action with a view to generating value for the owners of the two big Swiss banks in recent years. The two big Swiss banks, UBS and Credit Suisse (CS), are undoubtedly fundamentally sound and well-managed banks, but the difficulty appears to be in developing a strong business history to spark growth fantasies among investors.

Using the opportunities of digitization, which has been promoted prominently in recent years, is strategically the right thing to do to fend off competition from the fintech sector, but as a growth story, it’s not really well suited to make it beat more. fast the hearts of investors.

A defensive component rather than an offensive component of the strategy has been maintained. Using synergies between the various business units, the true raison d’être of a large bank, remains a huge challenge with modest success in results for the large banks.

If Goldmann Sachs bid

With a market capitalization of 22 and 37 billion, the two proud big Swiss banks are definitely acquisition targets payable for many of their larger competitors, especially from Asia and North America. The modest market valuation may be ignored for a while, but with the shareholder structure that the two big banks now have, that doesn’t go well for long.

The high proportion of foreign institutional investors and a very wide range of shareholders increase the chances of being the subject of an acquisition attempt. A “hostile takeover” is unthinkable in banking, customers and key people would quickly leave.

Initial skepticism among London, New York, Singapore, and Qatar-based investors would likely disappear quickly if, for example, Goldman Sachs offered a price 50 percent above the current share price, which, incidentally, is still a valuation below book value in both Gossbanks. measured in terms of book price over the next twelve months.

Pearls at a bargain price

The question that remains is what would a potential buyer do with UBS or CS. That’s the easier question, because both banks have real pearls in their asset management business for the sale of investment products and investment banking services.

The successful Asian business in particular should be very seductive to some competitors. The Swiss business money machine would also be extremely attractive to any acquiring bank, as it would be ideal for subsidizing cross-investment in other areas.

And all this with an extremely robust loan portfolio and a strong to very strong capital base. Even parts of investment banking are undoubtedly attractive targets (M&A advice, equity trading, and fixed income) and would open up great potential for synergy, especially for potential buyers who are already strong in investment banking.

Too small to compete?

The regulatory environment on the European continent is repeatedly cited as an obstacle to a larger transaction. The background for this is a certain obsession on the part of regulators with the theme of “too big to fail”, which is well founded, but which hampers the creation of a European champion. The longer a European “too small to compete” problem seems to emerge.

If, above all, regulatory issues impede a strategically sound merger, the sensitivity of the regulatory framework must be questioned. A concrete example will show which path the supervisory authorities involved in a European agreement will follow. The Swiss Financial Market Supervisory Authority (Finma) would also be particularly challenged if a deal across Swiss borders were to become a reality.

Is top management holding you back?

It should be noted that the initiative to search for acquisition partners came from UBS and its president Axel weber comes out. UBS is an even more attractive girlfriend than CS, as she runs the largest asset management business in the world, and therefore seems particularly attractive to many bank combinations (no other bank in the world has such access to wealthy clients around the world). However, this would also be expressed in a higher price for a potential buyer.

Top management is reluctant to make public statements these days. This is understandable, as mergers are primarily the responsibility of the board of directors. On the other hand, a takeover bid must always be linked to a strategic vision, which must at least be supported by senior management.

This still seems to be an open point, especially under the new head of UBS. Ralph hamers. The extent to which the interests of top management in such an issue coincide with the interests of the board of directors and shareholders must be considered critically. That can be a very important stumbling block.

Swiss global champion as a solution?

The belief that the two big Swiss banks are doing quite well is precisely why their independence is in jeopardy. Two good, low-priced banks make UBS and CS ideal acquisition candidates.

Perhaps one should re-evaluate the possible merger between the two large Swiss banks from this perspective: the creation of a “Global Swiss Champion” would certainly not be the solution to all growth problems, but combined with a strong business acumen, that would be from the perspective of the Swiss financial center at the moment. the best strategy to become specific acquisition targets.

Teodoro D. Cocca He has been Professor of Asset and Wealth Management at the Johannes Kepler University in Linz since 2006. Prior to that, he worked for Citibank for several years in both investment and private banking, conducted research at the Stern School of Business in New York, and taught at the Swiss Banking Institute in Zurich. In addition, the Swiss with Italian roots is an associate professor of private banking at the Swiss Finance Institute (SFI) in Zurich and advises companies and financial authorities in Switzerland and abroad. From 2011 to 2020 he was a member of the Board of Directors of VP Bank in Vaduz, where he headed the strategy and digitization committee.