September 5, 2023/Fitch Ratings

UBS’s 2Q23 results, which consolidate one month of Credit Suisse’ results for the first time, are in line with our expectation that the enlarged group’s initial capitalisation and earnings potential will provide sufficient flexibility to absorb restructuring and integration costs, Fitch Ratings says. The Stable Outlook on UBS Group AG’s ‘A’ rating reflects this expectation.

The figures for 2Q23 were positive in terms of the enlarged group’s initial performance and further integration, but UBS will continue to face significant execution risk until the full integration of Credit Suisse, which management intends to complete by end-2026. The unprecedented complexity of the integration entails many system migrations, mergers of legal entities, and client transfers in numerous jurisdictions. Execution risk was a key driver of Fitch’s one-notch downgrade of UBS Group AG’s rating to ‘A/Stable’ in June.

UBS’s record USD29 billion pre-tax profit in 2Q23 was driven by a similar amount of acquisition-related negative goodwill and translates into an underlying pre-tax profit of USD1.1 billion excluding integration-related expenses and acquisition costs. Half of the USD25 billion negative purchase-price-allocation adjustments performed by UBS to determine the negative goodwill relate to fair-value adjustments to assets that will pull to par if held to maturity. In line with our expectations, the resulting positive effect on the income statement in the coming years should give UBS material headroom to absorb any unexpected integration costs, but underlying profitability is likely to be modest in 2023.

Management’s intention to merge UBS AG and Credit Suisse AG, the group’s main operating companies, by end-2024 will be an important step in the integration of the two groups. Fitch aligned these entities’ ratings in June to reflect Credit Suisse’s status as a core part of UBS and our view that the failure risk of the two entities is now virtually identical.
 
UBS’s intention to fully integrate Credit Suisse’s Swiss operations and merge Credit Suisse (Schweiz) with UBS’s Swiss operations in 2024 removes the last sizeable strategic uncertainty. This will strengthen UBS’s domestic franchise and help reduce the revenue contribution of investment banking activities to below UBS’s pre-acquisition level. The integration should give rise to significant cost synergies and support UBS’s group-wide gross cost reduction guidance of over USD10 billion by end-2026 (including over USD3 billion in 2023). The small portion of Credit Suisse’s total investment-banking risk-weighted assets identified as core by UBS also confirms management’s commitment to align the Credit Suisse portfolio with UBS’s more conservative risk appetite.

UBS voluntarily terminated in August the public liquidity backstop (PLB) facility and repaid the emergency liquidity assistance (ELA+) facility provided by the Swiss central bank since March. It also ended the second-loss guarantee from the Swiss government covering non-core assets inherited from Credit Suisse. This is in line with Fitch’s expectation that government support would not be a permanent feature of the Credit Suisse acquisition and integration process. The termination of the PLB and the repayment of the ELA+ were made possible by the stabilisation of Credit Suisse’s deposit base in 2Q23, when assets under management also stabilised. This suggests regained confidence from Credit Suisse’s stakeholders, in particular, wealth management and Swiss domestic clients, which should facilitate UBS’s plans to expand its regional wealth management footprint and consolidate its leading positions in most regions.

At the group’s consolidated level, capitalisation at end-2Q23 provides comfortable headroom over minimum requirements, which will only start to rise gradually from 2026 to reflect the group’s increased size and systemic importance.

Fitch could downgrade the group’s ratings if unforeseen and severe challenges during the integration signal a heightened risk that its business, risk and financial profiles may be durably weakened. An upgrade is unlikely in the near term given the significant execution risks inherent in the challenging restructuring process.