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UBS and the CS Exit

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30 Okt 2024
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The Transformation of the Swiss Banking Sector: What Does the Loss of Credit Suisse Mean for SMEs?

The Swiss financial sector is undergoing a profound transformation following UBS's acquisition of Credit Suisse, a shift that will particularly affect Swiss businesses, especially SMEs, which are the backbone of the Swiss economy. This analysis examines the strategy of the new UBS, its impact on corporate banking, and the opportunities for other market players to fill the gap left by Credit Suisse. It also highlights the actions that Swiss companies need to take.

The New UBS – Universal Bank and Global Wealth Manager

The new UBS’s business strategy is primarily focused on Global Wealth Management and Asset Management, which together account for over a third of risk-weighted assets (RWA) and more than half of total revenue. Another third of the RWA is allocated to Personal & Corporate Banking in Switzerland, contributing around 20% of total revenue. Approximately 25% of RWA is tied to the Investment Banking division, while the remaining portion is designated to non-core and legacy areas, which are to be gradually phased out. With this structure, UBS positions itself as the world’s third-largest wealth manager with $5.9 trillion in assets under management and as the leading universal bank in Switzerland.

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Increased Risk Awareness and Profitability Enhancement

With the acquisition of Credit Suisse, UBS aims to capitalize on synergies and strategic advantages. A key focus is on increasing the return on common equity tier 1 (CET1) from the current 9.2% to at least 15% in the medium term (see Figure 2). To achieve this goal, UBS plans to stabilize its core areas, reduce financing costs, optimize its balance sheet structure, and lower its cost base. A particular emphasis is placed on adjusting the risk-weighted assets (RWA), which have increased by an additional $10 billion due to the acquisition (see Figure 3). This increase stems from Credit Suisse’s more aggressive lending practices and less comprehensive risk assessments compared to UBS.

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In other words, by acquiring Credit Suisse, UBS has taken on additional risks, which must now be optimized or reduced. To implement this strategy, UBS is limiting the refinancing of existing loans for certain former Credit Suisse clients. Additionally, UBS is demanding higher margins from these clients, as it assesses these engagements to be riskier than Credit Suisse previously did. The aim of these measures is to encourage less profitable clients to voluntarily end their banking relationship. Thanks to its strengthened market position, UBS can enforce these actions decisively and strategically leverage its market strength.

SME clients are particularly affected by this strategy. In the second quarter of 2024, the loan volume for SMEs dropped by more than 30% compared to the third quarter of 2023, from approximately $34 billion to just over $23 billion. At the same time, provisions for expected credit losses increased from 1.14% to 2.20%. UBS views this customer group as higher risk and uses the current economic environment as justification for margin increases. This approach has already attracted media attention, as several news outlets and newspapers have critically questioned UBS’s measures. There are reports of individual cases where loan margins were unexpectedly raised by 40% to nearly 100%.1

SMEs Seek Alternatives – Competitor Banks Benefit

Market shares in corporate banking have shifted significantly, with Raiffeisen banks and cantonal banks in particular welcoming former Credit Suisse clients. The Raiffeisen Group was able to increase its corporate loan volume by 3 billion CHF, representing a 7% growth compared to the previous year. Zurich Cantonal Bank also saw an increase of approximately 3 billion CHF, a rise of 10%. Other cantonal and regional banks have likely also benefited from this trend. Nevertheless, a vacuum remains in the Swiss bank credit market, as evidenced by the declining growth rate of domestic bank loans (see Figure 4).

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In this environment, various banks view the loss of Credit Suisse as an opportunity to expand their presence in Switzerland and establish a foothold in corporate banking.

How Will Competition Evolve?

The Swiss corporate banking sector is highly competitive. With 235 different banks, Switzerland has a high density of financial institutions. However, before the UBS takeover of Credit Suisse, about one in four SMEs had their primary banking relationship with one of the two large banks (see Figure 5). This is according to a 2021 representative study commissioned by the State Secretariat for Economic Affairs (SECO).

Cantonal banks and Raiffeisen banks play a more central role for small and medium-sized enterprises (SMEs), primarily due to their strong regional ties. With the disappearance of Credit Suisse, these banks could further expand their market share and strengthen their position, particularly during the period when UBS is reorienting itself and adjusting its strategy. Given the intense competition, UBS clients should not accept unfavorable changes to their terms passively but actively seek alternatives.

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Which Swiss Companies Should Act Now?

Not only former Credit Suisse clients now managed by UBS should carefully review their options and actively seek alternatives in the market, but other companies are also well advised to critically evaluate their banking relationships.

Many SMEs in Switzerland rely heavily on a single banking relationship (see Figure 6). This dependency often arises due to the significant effort involved in switching banks, whether in terms of time, costs, or administrative hurdles. To make this step worthwhile, the new bank must offer clear advantages. However, the recent developments surrounding the loss of Credit Suisse have shown that this effort can be justified to mitigate greater risks. Companies that relied heavily on Credit Suisse or the combination of Credit Suisse and UBS were caught off guard by the recent changes.

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The current market environment provides an ideal opportunity to reassess existing banking relationships. The intense competition among banks creates attractive conditions for diversifying risks and incorporating additional lenders into the financial strategy. By expanding to two or three banking relationships, companies can reduce their dependence on a single partner and sustainably strengthen their financial stability and flexibility.

As a company, are you looking for alternative options to your current banking relationship or considering diversifying your existing connections with additional banks?

smzh has an extensive network of banking partners and provides expert support and guidance on all matters related to tailored banking solutions.

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