UBS Group AG faced two big questions about its emergency rescue of Credit Suisse Group AG: How much profit would it make on the bargain deal? And would the distractions or taint of taking over the failing bank hurt its own business?
Its second-quarter results Wednesday should leave shareholders very happy on both points. The headline net profit of $29 billion for the three-month period ensures UBS has more than enough capital for its enlarged balance sheet, while strong wealth management inflows and a decent performance in investment banking showed UBS kept its people focused on their day jobs.
There are still gaps to fill in the numbers once UBS has done more business planning and negotiated with regulators over capital. But Chief Executive Officer Sergio Ermotti was confident enough to dangle the possibility of a swift resumption of share buybacks, with firmer news due in early 2024 at full-year results.
Of course, that makes the episode more galling for Credit Suisse’s erstwhile shareholders and holders of $17 billion of junior bonds that were wiped out, but Ermotti led with his defense on Wednesday’s earnings call. Credit Suisse didn’t simply have a funding problem sparked by depositor panic in March, he said, but a deeply flawed business model and a severely damaged reputation. Its revenue and costs were heading in the wrong direction, and it was set to report ongoing losses.
The suggestion is that it would keep losing capital, and there was little chance anyone would step up to replenish the pot – in other words, failure of some kind was ultimately inevitable. That’s a strong opinion, but it might not be wrong.
Back to the numbers: The headline quarterly profit is a world record for any bank, but that’s a fairly meaningless benchmark. That $29 billion is almost entirely the gain UBS made on the difference between what it paid for Credit Suisse and the target’s net asset value. All of that profit needs to be retained as capital to support the $238 billion of risk-weighted assets that Credit Suisse adds to UBS’s balance sheet. Buying a bank isn’t like buying a widget maker: A gain like this isn’t money that can be handed to investors.