Breakingviews: UBS cost-cut gains are a double-edged sword

UBS’s acquisition of Credit Suisse looks increasingly good – maybe a little too good. Boss Sergio Ermotti plans to keep the smaller bank’s domestic franchise, and reckons he can slash costs harder and faster than his predecessor Ralph Hamers had planned. The problem is that the cuts also increase the possibility of a backlash at home.

There were three key questions for shareholders ahead of UBS’s delayed second-quarter results on Thursday, its first since completing the emergency rescue of Credit Suisse in June. Would Ermotti increase Hamers’s target of $8 billion in cost cuts? How many clients have pulled money from or stopped dealing with the bank, to avoid being overexposed to one large counterparty? And what would UBS do with Credit Suisse’s local business?

Ermotti had good news on all three points. He’s keeping Credit Suisse’s Swiss business, which allows him to establish a dominant position at home and wring out juicy cost savings. Meanwhile, UBS’s key franchises have not been contaminated by the deal: its core global wealth business pulled in $16 billion of new client money in the three months to June 30, the unit’s best second-quarter performance in over a decade.

And while some Credit Suisse businesses are disappearing, Ermotti won’t mind. The acquired bank’s revenue fell $1.2 billion between the first and second quarters, after excluding one-offs like valuation adjustments. Annualising the quarterly decline suggests a yearly revenue hit of $4.7 billion. That pales in comparison to the more than $10 billion of costs that Ermotti now reckons he can slash. It’s also reassuring that the biggest top-line decline happened in Credit Suisse’s investment bank, which Ermotti plans to gut anyway. Reassuringly, the stricken bank’s wealth business is no longer seeing its clients pull their money.

The risk is that positive news for shareholders plays poorly in Switzerland. The bank booked $29 billion of earnings in the second quarter and a 178% return on tangible equity. That’s largely an accounting gimmick resulting from the fact that UBS paid less than $4 billion for the bank’s more than $30 billion of equity. But it’s nonetheless a number that may stick in Swiss politicians’ minds. So will the envisaged 3,000 job losses in the country, as Ermotti outlined on Thursday.

Legislators and regulators are already fretting about UBS’s new heft. Some politicians have proposed setting limits on the bank’s balance sheet. The Swiss Competition Commission is also studying the deal. After a 5% rise on Thursday, UBS’s share price is now up more than a third since March 17, the last trading day before it agreed the takeover. For Ermotti, though, the danger is that success with shareholders only paints a bigger political target on his back.