S&P and Moody’s cut UBS credit outlook to negative after Credit Suisse deal

S&P Global Ratings and Moody’s Investors Service downgraded UBS Group AG’s credit outlook as the bank faces integration and restructuring issues following an emergency takeover of Credit Suisse Group AG.

Both firms downgraded the Swiss lender’s outlook to negative from stable, with analysts citing the risk of customer attrition and the challenge of reducing Credit Suisse’s trading activity. UBS’ long-term rating has been affirmed by S&P at A-, while its senior unsecured rating has been affirmed by Moody’s at A3.

In addition, Fitch Ratings has placed the Long-term Issuer Default Rating (IDR) of UBS Group AG A+ and the Long-term IDRs of AA-UBS AG and UBS Switzerland AG on the negative list. All three companies with an ‘a+’ VR were also placed on the ‘negative’ list.

“We see significant execution risk with the integration of UBS and Credit Suisse,” wrote S&P analysts including Benjamin Heinrich and Anna Lozmann. They cited the “size and weaker creditworthiness” of Credit Suisse, “and especially the difficulty of winding down a significant portion” of its investment banking operations.

The 3 billion franc ($3.2 billion) takeover, agreed to in crisis talks over the weekend at the urging of the government, turns UBS from a predictable profit manager into a complex integration and restructuring with an as-yet unresolved issue. – an unknown number of jobs that are likely to be lost over the next few years. Credit Suisse failed to regain investor and customer confidence after a series of scandals and losses that led to a credit rating downgrade and higher funding costs.

UBS shares fell 16% on Monday before turning higher as investors weighed the pros and cons of a takeover staged to prevent a crisis of confidence in Credit Suisse from spreading. While the deal gives CEO Ralph Hamers a large wealth management operation and a valuable Swiss business at a bargain price and with government guarantees, the firm has had little time to assess potential risks, such as at investment bank Credit Suisse.

Moody’s stated that its “action balances, on the one hand, favorable financial conditions in terms of liquidity and capital, together with the long-term potential for franchise expansion, and, on the other hand, the complexity, extent and duration of integration.”

While the collapse of the investment bank would increase execution risk, S&P analysts said they expect UBS to be able to manage the merger, staff cuts and asset winddowns by “effectively limiting tail risk to capital, risk and financing profiles.”

S&P said that in its base case, the integration is likely to result in “customer churn in the combined company, especially in asset management and banking in Switzerland, where both entities have significant customer duplication.”

S&P said it could downgrade UBS if its financial profile weakens due to integration. Analysts said the outlook could be changed to stable if integration risk “decreases significantly and UBS is likely to maintain its strong creditworthiness post-merger.”

Fitch said the ‘negative’ rating review reflects the uncertainty about the impact of the acquisition on the two banks’ combined credit profiles. It also reflects the execution risk that would arise for UBS as a result of the acquisition, as well as the potential weakening of UBS’s business, risks and financial profile as Credit Suisse integrates and restructures in an increasingly challenging environment.

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