Everything you need to know about the fantasy joint venture between Credit Suisse and UBS that would annihilate 13,000 jobs
On one level, it all makes sense. By creating an investment banking joint venture of the kind suggested by JPMorgan analyst Kian Abouhossein, Credit Suisse and UBS would be propelled into the top five investment banks globally and achieve an estimated $19.9b in revenues by 2013.
The combined banks would:
- Be the second large equities player by 2013, with $7.5bn in revenues
- Be the sixth largest FICC player by 2013, with $8bn in revenues. The gains in FICC would be substantial, says Abouhossein, suggesting: "A combination of the FICC businesses of CS and UBS would be strong in credit trading including structured credit, [and] relatively strong in FX."
The blood letting
Naturally, there would be cost cutting. Naturally, there would redundancies.
Costs in the fantasy joint venture would be down 40% on combined costs currently, says Abouhossein. Headcount would be down 38% overall. A total of 13,000 people would go, with 57% of the cuts coming in equities, 30% in FICC and 15% in IBD.
As the punier of the JV partners, UBS would bear the brunt of the cuts: 45% of all its staff would disappear, compared to 'just' 32% at Credit Suisse. The evisceration would be worse in UBS equities: 55% of staff would go there. For those who can see it, we've posted the table detailing the job losses below.
Commodities and rates businesses would be exited entirely.
Source: JPMorgan
Dividing up the fantasy responsibilities
Credit Suisse wouldn't be in charge of absolutely everything in the JV, however.
Abouhossein says flow FICC would be run by UBS. Credit Suisse would get to run the structured FICC business.
UBS would also get to run equity flow derivatives. Structured equity derivatives would be run Credit Suisse. So would prime services, cash equities and electronic trading.
Clarifying the rationale
An investment banking JV between Credit Suisse and UBS seems a very rational option, says Abouhossein. He doubts that Credit Suisse will ever be able to make reasonable returns in FICC on a standalone basis and says its policy of expanding into the area has damaged shareholder returns.
After restructuring charges, he estimates the joint venture would release SF4.6bn of capital for CS and SF9.8bn for UBS; Credit Suisse would thereby reach a Basel 3 common equity T1 ratio of 12.5% by 2013, up from an estimated 9.4%. UBS would reach a similar ratio of 18.3%, up from 13.0%.
Nor would this be the first time two big Swiss banks have merged, points out Abouhossein: look at SBG (Union Bank of Switzerland) and SBC (Swiss Bank Corporation), which merged in 1997 and reduced their headcount by 24% over the next four years.
Is it a joke? Probably, yes
If it were April 1st, it would be easy to dismiss Abouhossein's note as springtime chicanery. It's not, so other banking analysts dismiss it as, "conceptual."
"I don't like to criticize a competitor's piece," said a senior banking analyst at another major firm, "but I only got one call on this today. The sales team only got 1 call too, which means either folk are too busy on other stuff or it's just a concept piece.
"The key is how on earth would it fund itself? And how on earth would the massive 'captive' private banking flows get dealt with," he adds. "Seems a non-starter."
Other banking analysts were equally skeptical. "They're still in an evolutionary process and this would be a revolutionary outcome," says one. "I don't think either bank is ready for that."
"This is highly unlikely to happen," says another. "Investment banking mergers are extremely brutal and hard to make work. The only time they're really worth it is when one party is given the other for free, in the style of JPMorgan and Bear Stearns or Barclays and Lehman."
