UBS Group AG (NYSE: UBS) jumps around 3% in pre trading session on Wednesday as Sergio Ermotti has a significant challenge ahead of him, as demonstrated by Chairman Colm Kelleher’s statement that the work of integrating Credit Suisse Group AG is greater than any deal carried out at the height of the financial crisis in 2008.
Kelleher said he couldn’t emphasize enough the magnitude of the task ahead for UBS to acquire its greatest rival. Ermotti will manage the bank through the purchase when Ralph Hamers steps down.
The largest financial transaction since 2008 is “this.” During a news conference on Wednesday, Kelleher stated, “I would say it’s greater than any deal that was done in 2008 because it’s the first merger of two systemically critical institutions. “It has a substantial execution risk.”
Ermotti will be in charge of determining which of the company’s executives, wealth managers, and investment bankers it wants to retain as well as shutting down significant portions of Credit Suisse’s investment bank. He has extensive understanding of the bank and experience in crisis management and restructuring from his prior ten years in leadership.
In 2011, when London-based Kweku Adoboli damaged the bank billions of dollars through unlawful holdings, Ermotti guided UBS through the crisis caused by rogue traders while striving to strengthen the bank’s risk management and control. Also, he eliminated the fixed-income trading division, reducing the investment bank’s size and sharpening its focus on wealth management. Competitors subsequently adopted that tactic.
Since the sub-prime loan debacle that started the financial crisis some fifteen years ago, the transaction between the two Zurich rivals is the greatest such combination of systemically significant banks. Large American lenders like JPMorgan Chase & Co. had to intervene at that time to save struggling lenders like Bear Stearns. To be fair, when Bank of America Corp. agreed to acquire Credit Suisse in 2008, it was only around two thirds the size of Merrill Lynch & Co.
Kelleher stated on Wednesday that there are considerable execution risks associated with the Credit Suisse purchase, and that UBS does not want to adopt Credit Suisse’s “poor culture,” which was predominantly found at the investment bank and in the control operations. Talented investment bankers are something the bank wants to maintain, he said.
S&P Global Ratings and Moody’s Investors Service both reduced the bank’s credit outlook in the days after the emergency rescue announcement. The rating agency emphasized the takeover’s integration and restructuring concerns.
On UBS’s merger of Credit Suisse, S&P analysts Benjamin Heinrich and Anna Lozmann said, “We perceive substantial execution risk.” They referred to “Credit Suisse’s scale and poorer credit profile” and “in particular, the difficulties of winding down a significant portion” of its investment banking activities.
