Swiss bank rescue to reshape landscape

The shotgun marriage of Switzerland’s two biggest banks will fundamentally transform the country’s banking sector — and will likely have a range of broader consequences too — says Fitch Ratings in a new report.

The rating agency said that the merger of UBS Group and Credit Suisse at the hands of Swiss regulators has long-term implications for the performance, regulation and risks of the country’s key banking business.

To start, the combination will produce a dominant force in the domestic banking market, accounting for 30% of bank deposits and 25% of loans and total assets. And, while the rescue will ease short-term stress in the banking sector, it also creates an even more systemic player, that could be tougher to manage in a future crisis.

“The integration of Credit Suisse into the higher-rated UBS should address the immediate impact of the loss of market confidence that ultimately led to the failure of Credit Suisse. But the creation of a dominant bank in the Swiss banking sector means that any problems at that bank in future cannot rely on a similar domestic solution,” Fitch said.

Given the heightened systemic risk, the combined bank will face stricter regulatory requirements “to ensure its long-term viability even in periods of stress,” Fitch said, adding that these added requirements will likely be phased in gradually.

“Maintaining confidence in the financial sector will be crucial for the Swiss authorities given the importance of the sector to the economy and because trust in the country’s currency and financial stability is key for attracting cross-border customers,” it said.

At the same time, other private banks and wealth management firms should also benefit from the combination, as high net worth clients seek to diversify their holdings beyond the new UBS, it noted.

“International competitors will also see this as an opportunity to strengthen their franchise given the attractiveness of wealth management in terms of capital requirements and returns,” Fitch said.

Additionally, the country’s large, increasingly-concentrated banking sector represents a risk to the sovereign’s credit rating, Fitch also noted.

In a separate report, Fitch said that impact of the Credit Suisse rescue on the sovereign balance sheet “will depend on how effectively the merger is executed and how the new bank performs, as well as the extent of losses on the ‘difficult-to-assess’ assets.”

The sovereign rating could come under pressure if the bank draws on the maximum guarantees provided by the government as part of the merger deal, it noted.

“The implications for the banking sector and the extent of any lasting reputational damage, which could weigh on the Swiss economy, will partly depend on how market participants react to some features of the government’s intervention, such as the decision not to consult UBS shareholders,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.