From Breakingviews - UBS kitchen sink has protection from further leaks
The key numbers in the mammoth document are the haircuts Ermotti applies to Credit Suisse’s balance sheet, and the charge he’s taking to cover possible future legal bills. UBS isthe target’s assets by about $10 billion, mostly in the loan book, while inflating its liabilities by about $3 billion – a reflection of funding commitments already made to Credit Suisse’s clients. The buyer is also taking a $4 billion provision to cover future litigation charges.
While there’s a kitchen-sink feel to those numbers, it’s far from clear that Ermotti has vanquished all the bad news. For starters, the filing is peppered with caveats, including that UBS still hasn’t managed to complete detailed valuations of the assets. That means any future markdowns could be larger. At roughly 2% of Credit Suisse’s overall loans and financial assets, the haircuts do seem rather modest.
The $4 billion legal charge is undoubtedly chunky, at roughly three times the most recent Credit Suisse estimate of likely future losses from cases that it hadn’t yet provided for. But it’s hard to judge how much the controversial deal itself has affected the combined group’s exposure. The filing’s risk factors note that UBS might inherit future court cases that could stem from the cancellation of Credit Suisse’s Additional Tier 1 bonds, for example.
Still, Ermotti’s $4 billion purchase price is miles below the $49 billion net asset value he’s buying. Meanwhile, the implied CET1 ratio of the group, after deducting all the relevant hits, is roughly 14%. That’s according to Breakingviews calculations that don’t reflect the impact of UBS’s markdowns on risk-weighted assets, which means the real ratio may be higher.
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