UBS is still cleaning up from the last crisis. Now it must tackle Credit Suisse

By Hanna Ziady, CNN

UBS is still dealing with the fallout from the 2008 global financial crisis even as it prepares to take on the enormous challenge of absorbing Credit Suisse.

Switzerland’s biggest lender said Tuesday it had set aside $665 million to cover litigation costs relating to past sales of US mortgage-backed securities, halving its profit for the first quarter just weeks before it expects to complete the emergency takeover of its stricken rival.

As UBS works to get its own house in order, it must also execute on the first-of-its-kind merger of two global banks while continuing to serve customers on a daily basis.

CEO Sergio Ermotti, who was brought back this month to manage the rescue of Credit Suisse, acknowledged the enormity of the task. “Of course things are going to be hard; it’s not a straight line to success. But I’m pretty confident that we will be successful,” he said in an online video.

“The challenges are definitely keeping the value of the franchises as intact as possible going into this transaction… and amalgamating the two cultures of the organizations,” he added.

UBS’s net profit tumbled 52% to $1 billion for the first three months of the year, knocked back by the increased provisions for toxic mortgages. The US Department of Justice launched legal action against the bank in November 2018, seeking penalties for sales that date back to 2006 and 2007.

“We are in advanced discussions with the US Department of Justice, and I am pleased that we are making progress toward resolving this legacy matter which dates back 15 years,” Ermotti said in a statement.

Shares in UBS fell almost 5% when markets opened before paring some of their losses.

Renewed concerns about the health of banks also played into the stock move, after America’s First Republic Bank said Monday that deposits had dropped 41% in the first quarter.

Clients in ‘wait-and-see’ mode

UBS said $7 billion had flowed into its wealth business after a March 19 deal to buy Credit Suisse, orchestrated by Swiss authorities. That bump in the last 10 days of March accounted for a quarter of net new inflows into its wealth management unit in the first three months of the year.

Despite reporting strong inflows in all regions, Ermotti said “challenging” economic conditions had left many clients adopting a “wait-and-see attitude.”

“We saw many clients moving into money markets and other forms of liquidity, but the good news is that the clients kept their assets with us,” he noted. “We have been seen by clients as a source of stability in the system.”

UBS will likely lose some customers over concerns about the Credit Suisse acquisition, Ermotti said, although he told analysts he was confident in the bank’s ability to “retain and regain clients” once it was able to “articulate the value proposition the combined organization can bring.”

UBS expects the transaction to close in the current quarter, although fully integrating the two businesses is expected to take more than three years.

Credit Suisse said Monday that money was still leaving the bank after it bled customer deposits worth 67 billion Swiss francs ($75.2 billion) in the first three months of the year. The lender said outflows had “stabilized to much lower levels, but had not yet reversed as of April 24, 2023.”

Credit Suisse has been plagued by scandals and compliance failures in recent years that wiped out its profit and caused it to lose clients. UBS plans to align Credit Suisse with its more conservative risk culture. Chairman Colm Kelleher has said UBS will put all Credit Suisse employees through a “culture filter” so as not to “import a bad culture” into the bank.

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