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The federal government’s guarantee of loss during the acquisition of CS can cost UBS dearly. In the worst case, he would have to allocate almost 400 million francs a year. This is due to the real losses in handling problem areas in CS.
As part of the immediate takeover deal on March 19, UBS had received guarantees from the federal government for losses of nine billion francs on a certain portion of the CS portfolio. However, this only happens when the five billion potential loss threshold that UBS will have to endure initially is exceeded.
40 million Swiss franc closing fee
However, the bank does not receive loss collateral for the next nine billion francs. Not only does it pay annual fees based on “actual or anticipated losses,” it also has to pay a one-time shutdown fee and an annual maintenance fee to cover ongoing federal costs. And full settlement will take several years.
Specifically, the one-time contract conclusion fee is 40 million francs, half of which is due or payable on 30 June and 30 September 2023. This is added to the annual maintenance fee of 36 million. Depending on the losses in the portfolio, then it can get really expensive: There can be an additional risk premium of up to 360 million per year (4 percent of the total value of 9 billion), according to the contract.
Loss warranty waiver?
Depending on the economic situation and developments in the financial markets, the sale and liquidation of domains can be very unpredictable. When the takeover was announced before UBS had full access to CS’ books, UBS wanted to protect itself from nasty surprises. High risk trading business will be closed in CS.
Recent speculations have brought up another issue. The “Financial Times” wrote over the weekend that UBS may waive the federal government’s nine billion loss guarantee. Management hopes to be able to announce that the bank will not use government guarantees when second-quarter results are released at the end of August.
Waiver for political reasons?
When asked by the AWP news agency, UBS declined to comment on the matter. But before that, he had stated that he wanted to avoid having to take advantage of the damage coverage at all costs.
Only since June 12, that is, after the legal completion of the takeover, did Credit Suisse have full knowledge of its ledgers. UBS may terminate the damage warranty agreement if it deems it can cover the problem areas with less loss and does not need damage coverage.
A termination would provide significant cost savings to UBS. Another advantage will be economic rather than political in nature: it will mainly blow the wind of left-wing arguments. Especially due to the federal government’s bailout, various politicians have called for the independent “survival” of CS Switzerland.
There will be more information soon
Given this mixed situation, it’s increasingly likely that detailed plans for integration won’t be announced until November, when third-quarter numbers are released, or possibly on investor’s day in the fall.
With uncertainties, pressure is mounting to provide more information by the end of August. On August 31, UBS plans to release business figures for the second quarter of 2023 for the first time as a combined bank.
More information can be obtained sooner. Theoretically, UBS can void the loss guarantee at any time. And in the event of a Swiss business decision, it will also be of temporary interest and will need to be notified immediately.
UBS CEO Sergio Ermotti (63) has repeatedly emphasized that he wants to be as transparent as possible. Three weeks ago, he said a plan for all areas of the bank was on the way. This will be new information as soon as possible. (SDA/koh)
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
