In the wake of UBS Group AG closing its acquisition of rival Credit Suisse AG, DBRS Morningstar confirmed its ratings on the combined firm, but with a negative trend due to the execution risks hanging over the deal.
The rating agency has withdrawn its ratings on the Credit Suisse holding company and affirmed its long-term issuer ratings on UBS and Credit Suisse’s operating company following the closing of their transaction.
UBS Group will manage two operating companies, UBS and Credit Suisse, with each firm having its own subsidiaries, branches and clients.
The ratings on those firms have a negative trend, which DBRS said “reflects the high degree of execution risks associated with the significant size of the acquisition at a time of elevated market uncertainty.”
While UBS has demonstrated its ability to generate strong earnings, DBRS said restoring the Credit Suisse franchises to profitability represents the main challenge.
“Negative pressure on the long-term ratings would occur if the combined franchise materially weakens, profitability levels significantly decrease, and/or if significant integration issues materialize,” it said.
However, the long-term rating outlook would return to stable if the combined firms’ credit strength holds up, “in spite of a likely lower capacity to generate earnings during the integration, and if execution risks are well managed.”
DBRS said it expects UBS to maintain its leading position in global wealth management, “with the acquired businesses clearly strengthening UBS’s franchise in this segment.”
Combined wealth assets under administration are more than US$5 trillion (pro forma) as of year-end 2022, it noted.
The transaction also reinforces UBS’s position as the leading Swiss bank, with major retail and commercial banking businesses in Switzerland, along with high-net-worth banking businesses in other major regions.
The investment bank is “not expected to grow significantly, with the majority of Credit Suisse’s market positions expected to be moved to a non-core division,” DBRS said, noting that the investment bank accounts for approximately 25% of total risk-weighted assets.
In the short to medium term, the transaction is expected to negatively impact profits.
DBRS noted that all of Credit Suisse’s divisions, except its domestic banking operations, recorded losses in the first quarter.
That said, UBS has downside protection in the deal, with the Swiss government guaranteeing up to 9 billion Swiss francs of potential losses on a portfolio of certain Credit Suisse assets.
DBRS said it expects the combined company’s capital position to remain strong, and that its funding and liquidity positions are also currently underpinned by a large deposit base and strong global wealth management business. UBS also enjoys easy access to liquidity from the Swiss central bank as part of the deal.
“We will continue to monitor the group’s reputational risks, including legacy issues,” DBRS said, noting that both firms still face certain ongoing legal issues. However, they have largely provisioned for outstanding litigation and regulatory costs, it noted.