Banking Market Update

The proposed merger between UBS and Credit Suisse, two of Switzerland’s largest banks, has been making headlines in the financial world. As the two banks move forward with the merger, an area that has been discussed but not fully addressed, is the handling of non-core assets in the takeover. Non-core assets can be categorized as portfolios that are equity dilutive, portfolios that are a drag on profitability, and portfolios that include products/geographies that are not strategic for the acquirer.

Both UBS and Credit Suisse have indicated that they will divest non-core assets as part of the merger, with the goal of streamlining their operations and improving profitability. However, the exact details of how they will handle these assets and which assets will be sold off have yet to be fully disclosed.

Where many make the mistake in scenarios such as this, is ignoring the non-core assets in the initial absorption of businesses. The divestiture or sale of non-core assets can have a significant impact on a bank’s long-term strategic goals and overall business model and so, should be addressed quickly – to avoid creating an equity drag – and correctly – to ensure maximum returns. It is therefore essential to prioritize and manage these assets properly to avoid adverse effects.

A significant challenge in the process of divesting non-core assets is finding a suitable buyer. Management teams have a limited amount of bandwidth when investigating the objectives associated with core and non-core businesses post-merger but without focus, non-core assets which are ripe for sale could see a reduction in value if not addressed quickly. Issues that can arise include:

• • buyers not understanding the true value of the asset;

• • loss of talent as people exit in the face of uncertainty;

• • disrupted clients/customer journeys in the non-core assets; and

• • potential for regulatory hurdles to arise during the divestiture process

In summary, banks must manage non-core assets appropriately to avoid adverse effects on their long-term strategic goals and overall business model. This involves prioritizing and managing the non-core assets during a merger, addressing potential challenges (including regulatory) and finding suitable buyers where needed. Given senior bandwidth is likely limited – hence UBS’ hesitancy is announcing its plans for Credit Suisse’s non-core assets – selecting a reputable and specialized advisor can speed up processes, ensure the correct buyer group are identified, and aid in achieving a clean exit.  By taking these steps, banks can increase the chances of success and mitigate the risks associated with managing non-core assets.

We expect that the current macroeconomic climate will continue to create similar situations for other banks in the US and to a lesser extent, Europe – where banks tend to be better capitalised. However, the combination of rising interest rates, inflation, geopolitical risks and falling RE prices (a major form of security for banks) is somewhat of a perfect storm of credit risk factors. Therefore, we believe banks must have a clear strategy for managing non-core assets (including NPLs) during mergers and acquisitions. It is crucial to deal with these assets early to ensure that they do not negatively affect the bank’s long-term success.