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UBS may be able to cut costs once it buys Credit Suisse, but first it will have to grapple with declining revenue, analysts said in notes expressing caution over the deal.
UBS agreed to buy Credit Suisse in a deal initially valued at 3 billion francs and backstopped by the Swiss government.
Jefferies downgraded its rating on UBS
UBSG,
UBS,
to hold from buy, and cut its price target to 20 francs from 24 francs. The brokerage recommended investors switch into BNP Paribas
BNP,
UBS shares slumped 8% in Zurich trade. Credit Suisse shares
CSGN,
which now trade in lockstep with UBS after the all-stock transaction, were at 74 francs, below the 76 franc consideration agreed in the deal.
Read: Deutsche Bank shares slump in latest sign of bank worries
Analysts led by Flora Bocahut say UBS faces a long and difficult road ahead. They flag revenue dis-synergies of around 4 billion francs as well as having to execute on cost cuts, wind down Credit Suisse’s investment bank, navigate the losses of both clients and staff, and resolve litigation.
“It may well get worse before it gets better,” said Bocahut. “We need evidence that restructuring progresses, without hurting UBS’ franchise much, to get confidence in the re-rating potential.”
The sentiment is similar in the Citigroup
C,
corner. Its analyst team retained its buy rating on UBS “given the attractive long-term prospects,” but it also moved the Swiss lender to a high risk rating because of the “limited disclosure and high execution risk in the near/medium-term.”
It also placed a price target 24.00 Swiss francs, slightly higher from 22.00 francs.
Citigroup also said that UBS has guided around $8 billion of cost saves by 2027, a “plausible” measure to the analyst team. However, they say the key issue is the level of “revenue dis-synergies”, something that UBS management have not been able to quantify yet.
“We see a combined revenue attrition of $5 billion, which we assume will be realized ahead of the cost saves, impacting on earnings,” the team added.
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