Combining the asset management divisions of UBS and Credit Suisse could bring to light several synergies but the road to the final outcome is filled with uncertainties while competitors and institutional investors will look to readjust to new conditions.
The merger of the asset management businesses of the two Swiss banks could create the third largest asset manager in Europe, with combined assets under management (AUM) of close to €1.50trn, after Amundi with €2trn and Legal & General Investment Management with €1.69trn, according to IPE’s figures.
“The management of UBS Asset Management will look forward to growing the business as a scale, however in most cases the mergers of institutional asset managers do not succeed as envisaged because they lose portfolio managers, they lose clients and they get downgraded by consultants, especially pension consultants, and end up with rather slim results,” Ray Soudah, founder and chair of the board of MillenniumAssociates, told IPE.
From a purely financial perspective, the outcome of the merger is positive for UBS that is buying Credit Suisse’s asset management unit for “nothing”, Soudah added, but the execution and business integration brings with it “problems of massive proportion” that could affect perfomance and lead to losing clients, at the benefit of other asset managers to some extent.
Pension funds’ independent consultants usually recommend a ‘wait and see’ approach after these kinds of mergers. Pension funds may be advised to look for other providers,” he said, adding that in these kinds of transactions there is typically also a duplication of clients and products.
Looking for synergies
UBS has bought Credit Suisse for CHF3bn, pressed by the Swiss government, the financial regulator FINMA and the Swiss National Bank (SNB) to close the deal to avoid a systemic financial crisis.
Last year, Credit Suisse conduced a strategic review, deciding to restructure its investment banking division, and reallocate capital to core and higher-return businesses such as wealth management, the Swiss bank, and asset management, by 2025.
The lender is split into five divisions including those three units, with €409bn in total assets, the investment bank and a new capital release unit established to wind down non strategic assets.
Credit Suisse’s asset management lists among its clients pension funds, governments, foundations and endowments, with a strong presence in the Swiss market, offering active and passive investment solutions in traditional asset classes and alternatives, including credit investments, hedge fund strategies, real estate and commodities, it said in its financial statement for 2022.
UBS’s asset management, with $1.1trn in AUM, is continuing to grow its indexed business globally, including ETFs in Europe, Switzerland and Asia, as the demand from customers increases, its 2022 financial statement added.
It invests in traditional and alternative asset classes: equities, fixed income, hedge funds (single- and multi-manager), real estate and private markets, it added.
“In principle, there should be substantial synergies in the asset management business [of the banks]. From a business point of view, it would make sense to merge the products and, as far as possible, to retain the best qualities of the previous products. This makes particular sense in areas where the unique selling propositions and importance of the brand are limited,” Philipp Weber, head of investment consulting at Mercer Switzerland, told IPE.
It would not make much sense, instead, to keep two passive product ranges for the same benchmark indices in the long run, according to Weber, who also believes that two custody and reporting solutions will not be offered in parallel in the future.
The merger of the banks’ asset management units would result in a further concentration in the institutional asset management business, especially in the field of custody, reporting and index solutions, possibly reducing the pressure on margins.
Weber added: “In the field of account deposits, the merger is likely to result in the trend towards diversifying deposits across additional medium-sized and smaller banks. Some investors are likely to consider it more and more importantly to avoid a concentration of providers in the future.”
Bumpy integration
UBS, itself the result of the merger of Swiss banks Union Bank of Switzerland and Swiss Bank Corporation (SBC), acquired brokerage and asset management firm PaineWebber in 2000 to expand in the US.
After the financial crisis in 2008, when it was bailed out by the Swiss government and the SNB, UBS started a strategic transformation to focus on the traditional businesses of wealth management globally, and personal and corporate banking in Switzerland, restructuring to align to new regulatory ‘too big to fail’ requirements.
“The management of the asset manager division of UBS does not have experience on mergers, and UBS has not done mergers in asset management for years,” Soudah said.
He noted that the latest transaction to buy Credit Suisse was essentially hostile, done in a short amount of time and not conducive to better than average results in a potential merger between the asset manager divisions of the banks.
Heinz Rothacher, chief executive officer at consultancy Complementa, has compared the Credit Suisse/UBS merger with the merger of Bank of America and Merrill Lynch during the financial crisis in 2008.
“Bank of America has continued to grow and Merrill has disappeared altogether,” Rothacher said, adding that in Switzerland banking regulations will have to be revised, looking at ‘too big to fail’ requirements.
Soudah believes, along the same lines, that Credit Suisse will decline slowly, even before the merger, because people will leave without incentive to stay, and the bank will face an immediate challenge to keep the business going.
UBS may cut tens of thousands of jobs after the acquisition, according to reports, and Credit Suisse has already planned under the new strategy to reduce the number of employees from 52,000 at the last quarter of 2022 to approximately 43,000 employees by the end of 2025.
“I do expect some professionals to be out of work, and UBS will aim to lift the productivity of larger funds. I believe Credit Suisse has not given and is not going to give a six months bonus to keep key people in the business during the integration so that the business is protected. UBS may end up buying a deteriorated business,” Soudah said.
Competition
In asset management, UBS considers its competition firms with a specific market or asset-class focus, and global firms including AllianceBernstein, Allianz Asset Management, Amundi, BlackRock, DWS, JPMorgan Asset Management, Morgan Stanley Investment Management, Schroders, and T. Rowe Price.
A top-10 Swiss institutional asset manager, who did not want to be named, said the integration of the banks is an “Herculean task”, as UBS bought Credit Suisse practically for free.
The asset manager said the market will identify the players that are specialists in wealth and asset management niches and, logically, this will lead to winning over clients, adding that the merger will impact the way clients diversify services among banks that will likely not continue to offer overlapping products.
The Pensionskassen that hold mandates with banks are a typical example of a player that considers diversification important, and could reallocate mandates following the merger, the manager said.
The asset management industry in Switzerland and Europe is diverse, and even if the market tends to consolidate in the long term, there is still a large number of providers, competition remains intact, a spokesperson for Swisscanto, the asset manager of the Zürcher Kantonalbank, told IPE.
However, Institutional clients will lose a fund provider as a result of the UBS/Credit Suisse deal, and will have to examine how to diversify, it added.
Swisscanto will continue to follow the developments in the market the competitors closely as the third largest Swiss asset manager wants to conitnue to grow in the years to come.
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