UBS agrees to buy Credit Suisse: Morningstar’s Scholtz says CS investors will ‘feel shortchanged’

UBS Group AG (NYSE: UBS) agreed to acquire rival Credit Suisse Group AG (NYSE: CS) in what would have “seemed like a terrific deal” – had the agreement taken place a week ago, Morningstar analyst Johann Scholtz said in a note sent to Invezz. While the “position is less clear” today amid notable net outflow of client funds in recent days, UBS will likely emerge in a stronger position over time.

UBS to execute ‘radical restructuring’ of Credit Suisse

According to Scholtz, UBS is in a strong position to execute a “radical restructuring” of Credit Suisse. The analyst estimates that UBS’ 2027 cost savings target of $8 billion would reduce Credit Suisse’s 2022 adjusted operating expenses by roughly 60%. 

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Of course, all restructuring activities come at a material cost, but “UBS is better placed than Credit Suisse to absorb this,” the analyst wrote. Meanwhile, the Swiss regulatory body wrote down the value of Credit Suisse’s CHF16 billion additional tier one (AT1) capital to zero and this gives UBS additional capital to absorb markdowns and restructuring charges. 

This is on top of an additional CHF9 billion in downside protection that was also provided by the Swiss authorities.

Credit Suisse investors ‘will feel shortchanged’

Credit Suisse investors will “feel shortchanged” as the price tag on the acquisition implies a substantial discount compared to Credit Suisse’s stock price on Friday, the analyst continued. 

Credit Suisse’s viability as a going concern was “clearly under threat” due to reports the bank was losing CHF10 billion a day in deposits.

Bottom line, Credit Suisse shareholders “were fortunate not to be wiped out completely”, although for many long term shareholders this seems like the case. In theory, AT1 capital has seniority status compared to common equity.