UBS/Credit Suisse: the fortune of “bad will” heralds hard integration

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“Ill will” sounds like something that could sour a deal. Instead it can be the icing on the cake. Accounting change, more commonly referred to as “negative goodwill,” will add $34.8 billion in UBS profits. That compares with the price tag of just $3.5 billion the Swiss asset manager has agreed to pay for ailing rival Credit Suisse.

The question for investors is whether the double negative counts as a single positive per UBS extension.

Badwill crystallizes when a buyer purchases a target below the fair value of its net assets. Accountants record it as an income via the income statement when they add those intangible assets to the balance sheet. Regulators allow some or all of the amount to be counted towards capital buffers.

Credit Suisse disclosed net assets of $48.8 billion at the end of 2022. UBS will cautiously insert the lower figure of $34.8 billion into its income statement. Its bean counters have incorporated a discount to allow for potential hits to Credit Suisse’s balance sheet. These range from asset value collateral cuts to projected $4 billion in litigation costs.

The sum is still substantial. But investors were hoping for more. In a presentation, UBS estimated that after closing this quarter it would have $81 billion in reserve capital, defined as common equity tier one. That’s $8 billion short of Barclays’ total analyst forecast.

Also, $34.8 billion is modest, measured against the $275 billion of risk-weighted assets UBS will absorb from Credit Suisse.

So how should we view UBS’s ill-will wealth? The first point is that this is paper earnings. It is non-cash, payable to shareholders in dividends. The second problem is that the value of ill will could easily be de-balanced by the discovery of more skeletons in the graveyard of a Credit Suisse closet.

The market rightly remains fixated on whether UBS CEO Sergio Ermotti could integrate Credit Suisse to create a bigger, more profitable bank. This will determine whether UBS can catch up with the sector indices it currently lags. To attractively distribute an accounting cherry, you first need a cake to place it on.