Overview

• On March 19, 2023, UBS announced the acquisition of Credit Suisse (CS). We expect the integration and anticipated rundown of large parts of CS' investment banking activities will carry material execution risk given CS' size, complexity, and risk profile.
• We believe that UBS' management will prudently execute the CS integration and, due to the very high financial buffers resulting from the transaction and massive liquidity support from the Swiss central bank, we see sufficient buffers to limit emerging risks effectively.
• We revised our outlook on Swiss holding company UBS Group AG to negative from stable, reflecting pressure on the group's stand-alone creditworthiness linked to execution risk from the integration. We also affirmed our 'A-/A-2' issuer credit ratings on UBS Group.
• At the same time, we affirmed our ratings on the group's related entities, including our 'A+/A-1' ratings on core operating subsidiaries such as UBS AG.
• The stable outlook on UBS AG and other core operating entities reflects the additional loss-absorbing capacity (ALAC) buffer we would incorporate into our ratings if we lower the group stand-alone credit profile by one notch.

Rating Action

On March 20, 2023, S&P Global Ratings revised the outlooks to negative from stable on UBS Group AG and UBS Americas Holding LLC, the UBS group's nonoperating holding companies. We affirmed the 'A-/A-2' issuer credit ratings on both entities.

We also affirmed our 'A+/A-1' long- and short-term issuer credit ratings on all of the group's core operating entities, such as UBS AG. The outlooks remain stable.

In addition, we affirmed our issue ratings and resolution counterparty ratings on all entities.

Rationale

We see material execution risk in UBS' integration of Credit Suisse (CS).  On March 19, 2023, UBS announced that it would acquire CS in full, in a deal orchestrated by the Swiss Federal Department of Finance, the Swiss National Bank, and Swiss banking regulator FINMA to restore investor confidence in the financial sector. We see material execution risk in integrating CS into UBS given the size and weaker credit profile of CS and particularly the complexity in winding down a large part of CS' investment banking operations. This could mean a weakening of the combined group's competitive position or underperformance against its financial targets because of sizeable restructuring or litigation costs, pressure on revenue capacity, or setbacks in realizing cost savings. In our base case, we already anticipate client churn at the combined entity, particularly in wealth management and Swiss banking, where both entities have significant client overlaps.

Major financial support measures will enable UBS to accelerate the wind-down of legacy assets and effectively limit the financial costs of the integration. We believe the tail risks to UBS' capitalization are low overall due to significant downside protection through the terms of the transaction. UBS is paying Swiss franc (CHF) 3 billion (about $3.2 billion) for CS, a fraction of CS' tangible book value of CHF42 billion at year-end 2022. This will likely result in realization of material badwill, even after the revaluation of CS' balance sheet. In addition, the Swiss government is providing CHF9 billion of protection should losses from the complex, lengthy, and costly wind-down of the separately managed non-core units exceed CHF5 billion. At the same time, the write-down of CS' approximately CHF16 billion in additional Tier 1 (AT1) instruments will further strengthen the core equity base of the combined entity. We also note the Swiss National Bank's extraordinary measures to provide massive liquidity support to the combined group, which should ensure solid buffers at the consolidated and legal entity levels. This will help to restore market confidence through the early phase of the integration.

We recognize UBS' strong track record in delivering its strategic and financial targets. In our base case, we expect UBS will prudently execute and manage the integration, reduction of staff, and wind-down of assets, while effectively limiting tail risk to the capital, risk, and funding profiles. We note that CS' stand-alone creditworthiness is significantly weaker, but we believe that UBS has sufficient downside protection to effectively shield against elevated risks emerging from the acquisition and following integration.

Outlook

UBS Group AG

The execution risk from the integration and restructuring of CS is the main consideration for our ratings on UBS Group AG. The negative outlook reflects risk to franchise strengths, profitability, and funding, alongside potential tail risk from winding down a large part of CS' activities in investment banking.

Downside scenario: We could revise down our 'a' stand-alone credit profile (SACP) and lower our rating if we think the financial profile has weakened because of the merger, or if the integration reveals greater risk than we currently expect. In this scenario, we would also lower our issue ratings on all related instruments including hybrid capital.

Upside scenario: We could revise the outlook to stable if we believe execution risk on the integration has significantly reduced and UBS is likely to maintain its strong creditworthiness post-merger.

UBS AG

The stable outlooks on UBS AG and other core operating entities reflect our view that a one-notch downward revision of the group SACP to 'a-' is unlikely to affect the ratings on core entities. This is due to UBS' high ALAC buffer and the additional notch of ALAC uplift that would be available in this scenario. Our ratings on hybrid capital instruments issued by UBS AG would likely be affected since they are directly linked to the group SACP.

Downside scenario: Although unlikely, we could downgrade UBS AG and other core operating entities if we revise down the SACP by two notches to 'bbb+'. We could lower the ratings if capitalization decreases sharply because of the merger from realization of risks, or if outstanding or new litigation cases could result in significant charges that are materially beyond our base case.

Upside scenario: An upgrade is a remote scenario, given the complexity of the integration and already high 'a' group SACP.

Ratings Score Snapshot

ESG credit indicators: E-2, S-2, G-2

Related Criteria

• General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
• Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• UBS Group AG and UBS AG, Feb. 6, 2023

Ratings List