The acquisition of Credit Suisse Group by UBS Group and the events that led to it will result in profound changes to the Swiss banking sector that will affect the sector’s performance, regulation and risks for the longer term, Fitch Ratings says. The combination of the country’s two largest banks will create an outsized player in the domestic market, about twice the size of its largest competitor with a pro forma market share of about 30% of domestic deposits and 25% of domestic loans, and total assets, pro forma at end-2022, close to 200% of Switzerland’s GDP.
 
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. The Swiss authorities have announced that the new group will be subject to tightened regulatory requirements to ensure its long-term viability even in periods of stress, but these requirements will be phased in gradually.
 
We expect UBS to be strongly capitalised immediately after the merger given the CHF56 billion negative goodwill arising from the acquisition, the write-down to zero of Credit Suisse’s additional Tier 1 capital and the CHF9 billion second-loss guarantee from the Swiss government for certain positions. We also expect that that some of the additional liquidity facilities from the Swiss National Bank will remain available beyond the legal completion of the acquisition.
 
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. Switzerland-based private banks and wealth managers should benefit from client asset inflows as wealthy customers will want to diversify their banking relationships from UBS, but 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.
 
The business models of the large Swiss private banks have focused on the ability to provide wealth management services globally, and the banks have the capability to offer their services in several booking centres both inside and outside Switzerland.
 
The combination of UBS and Credit Suisse will result in a strong domestic banking franchise in a sector that despite its limited size has provided good opportunities because of the relatively high wealth and sophistication of the Swiss customer base. We expect that the Swiss domestic banks will benefit from retail and corporate customers wanting to diversify their banking relationships, but the enlarged UBS will be the only group with a countrywide network for larger corporates.
 
The mutual Raiffeisen Group is the only other Swiss banking group with a nationwide branch network, but it concentrates more on retail and smaller businesses, while the cantonal banks concentrate their corporate business on their home regions. International competitors may therefore see opportunities, particularly in the large multinational corporate sector.