UBS Group AG expects a financial hit of about US$17 billion from the takeover of Credit Suisse Group AG, the bank said in a regulatory presentation as it prepares to complete the rescue of its struggling Swiss rival.
UBS estimates a negative impact of US$13 billion from fair value adjustments of the combined group's assets and liabilities. It also sees US$4 billion in potential litigation and regulatory costs stemming from outflows.
UBS, however, also estimated it would book a one-off gain stemming from the so-called "negative goodwill" of US$34.8 billion by buying Credit Suisse for a fraction of its book value.
The financial cushion will help absorb potential losses and could result in a boost to the lender's second-quarter profit if UBS closes the transaction next month as planned.
UBS said the estimates were preliminary and the numbers could change materially later on. It also said it might book restructuring provisions after that, but offered no numbers.
"The financial information lacks an estimate of restructuring provisions as these will be booked after the transaction closes," Vontobel analyst Andreas Venditti said in a note.
Analysts at Jefferies have estimated restructuring costs, litigation provisions and the planned winding down of the non-core unit could total US$28 billion.
Meanwhile, UBS has implemented a number of restrictions on Credit Suisse while the takeover is underway.
In certain cases, Credit Suisse cannot grant a new credit facility or credit line exceeding 100 million Swiss francs (US$113 million) to investment-grade borrowers or more than 50 million francs to non-investment-grade borrowers, a UBS filing showed.
"Credit Suisse obviously found itself in a problem because of lapses in its risk controls and I think just setting these parameters on the ability or standards to lend out is not very unreasonable," said Benjamin Quinlan, Hong Kong-based chief executive of financial consultancy firm Quinlan & Associates
"Ultimately, from UBS' perspective, they will have to wear these risks on their books."
Credit Suisse also cannot undertake capital expenses of more than 10 million francs as part of the restrictions or enter into certain contracts worth more than 3 million francs per year.
The filing shows Credit Suisse cannot order any "material amendments" to its employee terms and conditions, including remuneration and pension entitlements, till deal closure.
The restrictions "will cause certain clients to leave Credit Suisse" but may not accelerate the pace of outflows already seen, said Quinlan, following UBS' statement last week that Credit Suisse had already stemmed asset outflows.
RUSHED INTO DEAL
UBS said it was rushed into the deal and had less than four days to complete due diligence given the 'emergency circumstances' as Credit Suisse's financial health worsened.
UBS agreed in March to buy Credit Suisse for 3 billion Swiss francs (US$3.4 billion) in stock and to assume up to 5 billion francs in losses that would stem from winding down part of the business, in a shotgun merger engineered by Swiss authorities over a weekend amid a global banking turmoil.
The deal, the first rescue of a global bank since the 2008 financial crisis, will create a wealth manager with more than $5 trillion in invested assets and over 120,000 employees globally.
The Swiss state is backing the deal with up to 250 billion Swiss francs in public funds.
Switzerland's government is providing a guarantee of up to 9 billion francs for further potential losses on a clearly defined part of Credit Suisse portfolio.
UBS signalled no quick turnaround for the 167-year-old Credit Suisse, which came to the brink of collapse during the recent banking sector turmoil after years of scandals and losses.
It said it expected both the Credit Suisse group and its investment bank to report substantial pre-tax losses in the second quarter and the whole of this year.
Following the legal closing of the transaction, UBS Group AG plans to manage two separate parent companies – UBS AG and Credit Suisse AG, UBS said last week. It has said the integration process could take three to four years.
During that time, each institution will continue to have its own subsidiaries and branches, serve its clients and deal with counterparties.