UBS aims to avoid using $10bn Credit Suisse backstop amid backlash

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UBS is aiming to make clear next month that its rescue of Credit Suisse will not rely on funding from Swiss taxpayers, as the political backlash against the deal builds ahead of national elections later this year.

As part of the takeover, the Swiss government agreed to shield UBS from up to SFr9bn ($10bn) in any losses from the deal, provided the bank bore the first SFr5bn.

The scale of potential state support for the shotgun marriage of the country’s two biggest banks has proved politically explosive and continues to draw criticism in the run-up to national elections in October.

UBS executives are hoping to announce that the bank will not call on the government backstop when it publishes its second-quarter results on August 31, according to two people familiar with the matter.

A third person familiar with the matter said a decision not to draw on taxpayers’ money, which still needs to be finalised, would be driven by the business case for doing so rather than any political considerations.

Since the takeover was struck over a weekend in late March, UBS executives have grown far more confident that losses from winding down large parts of Credit Suisse’s investment bank would be kept below SFr5bn.

The threat of the turmoil that swept through the banking industry turning into a more serious financial crisis has receded and markets have recovered.

At its second-quarter results, UBS is also expected to announce whether it will keep Credit Suisse’s domestic bank, another politically contentious decision. UBS chief executive Sergio Ermotti recently told staff that holding on to the business was still the “base case scenario”.

Executives have also been at pains to show investors they will try to limit their dependence on the state and avoid using the loss protection facility.

“There is a clear intention by UBS’s management team not to go into the SFr9bn, only if there is a big credit crisis and markets collapse,” said one person familiar with the matter. “But under normal operations and market conditions, there should be a scenario where they do not use the second loss tranche.”

Ermotti has insisted that Swiss taxpayers are “exceptionally unlikely” to suffer losses from the takeover. The deal also involved a SFr100bn liquidity lifeline from the Swiss National Bank.

“UBS will be hesitant to use these support measures, as . . . it could limit UBS’s options when it comes to returning excess capital to shareholders,” said Johann Scholtz, a banking analyst at Morningstar.

The bank suspended its $6bn share buyback programme in the wake of the takeover, but management is keen to restart it in an effort to help close the valuation gap with its US peers.

UBS declined to comment.