UBS said it expected an accounting gain of $35 billion from the government bailout of Credit Suisse, below some expectations, and separately disclosed $17 billion in write-downs and litigation provisions.
In a filing with U.S. regulators on Wednesday, the Swiss lender detailed for the first time its early estimate of the financial impact of the merger – the biggest banking deal since the financial crisis that is expected to take up to four years to achieve its complexity.
UBS said it should have made an accounting gain of $34.8 billion from the deal because it bought the rival for a fraction of the book value of its assets. The so-called “negative goodwill” is calculated by subtracting the purchase price of $3.5 billion from the fair value of net assets of about $38 billion.
That was less than the theoretical profit of $57 billion for a number of reasons, including changes in the fair market value of assets, pension liabilities and adjustments for the two banks using different accounting standards.
KBW analyst Thomas Hallett said the disclosed lower-than-expected equity and capital gains “negate the bull case element in our view and further support our more cautious stance on UBS”. “With so many unknowns and potential risks to resolve, we believe investors are better off staying on the sidelines until visibility improves.”
“The news is a reminder of how much accounting noise there will be at UBS for the better part of the next decade – a mess that will last for years,” he added.
Still, negative goodwill would provide UBS with a paper profit that could be used to cushion various losses and integration costs on the deal. Controversially, the Swiss government and regulator Finma also paved the way for the bank to write off $17.1 billion in additional tier-one bonds (debt instruments that can be converted into equity), prompting investor lawsuits.
In the filing, UBS said it would write down Credit Suisse’s assets by $13 billion, set aside $4 billion for regulatory and litigation matters, and said it would incur additional restructuring charges after the deal closes.
The main assets to be written down are Swiss mortgages and trading assets, notably the investment banking business that UBS plans to exit.
Anke Reingen, an analyst at RBC Capital Markets, said her calculations project a higher Tier 1 common equity ownership level of 15.4%, compared with the 14.2% disclosed by UBS on Wednesday.
Shares were little changed after the offering.
After years of scandal and losses, Swiss institutions stepped in to help UBS rescue its ailing rival in March after hundreds of billions of dollars in client withdrawals threatened to topple Credit Suisse. The state provided more than 250 billion Swiss francs ($278 billion) of public money and guaranteed UBS 5 billion Swiss francs against losses to boost UBS’s deal.
The document disclosed other details about the merger. UBS saved about $400 million by eliminating Credit Suisse’s employee bonus scheme linked to AT1 bonds. It also prohibits Credit Suisse from issuing new credit lines exceeding 100 million Swiss francs to investment-grade companies, and from issuing new credit lines exceeding 50 million Swiss francs to junk borrowers.
UBS expects a $1 billion gain in Credit Suisse’s global real estate portfolio, but this will be more than offset by a $2 billion loss in its capitalized software assets.