$8 Billion In Savings? The 'Impeccable' Logic Of UBS-Credit Suisse Deal, According To One Analyst

UBS Group AG UBS shares jumped Monday morning after the bank's Sunday agreement to buy Credit Suisse Group AG CS for $3.25 billion. On Monday, one analyst said the Credit Suisse acquisition makes UBS an attractive investment.

The UBS Analyst: Bank of America analyst Alastair Ryan upgraded UBS from Neutral to Buy and raised the price target from $22.72 to $24.87.

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The UBS Takeaways: In the upgrade note, Ryan said UBS should expect substantial cost synergies from the merger. The bank estimates synergies of around $8 billion by 2027, which is roughly 19% of the combined 2022 cost base.

"The industrial logic is impeccable: CS was the closest competitor to UBS in wealth management and Switzerland; and both banks are heavy in Swiss central costs," the analyst said. 

Credit Suisse boosts UBS's share of Swiss deposits to around 30% and increases its total invested assets by 25% to $5 trillion. In addition, Ryan said UBS's investment bank balance sheet will now represent a smaller 25% of its total balance sheet, down from around 33% historically.

"We see UBS's capital generation being strong enough to maintain the current dividend policy, with high payouts ongoing should litigation cases be settled and so long as the balance sheet allocated to the IB remains constrained," Ryan said.

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For now, he said UBS maintains a strong cash position and is significantly above a 13% Common Equity Tier 1 ratio.

He added that Credit Suisse helps boost UBS's scale in its core business.

Bank of America projects UBS's EPS will drop 7.7% in 2023 but rebound by 28.7% in 2024.

UBS Price Action: UBS shares were trading 4.04% higher at $18.93 late Monday morning. 

Benzinga's Take: The market certainly approves of the acquisition given UBS's price action on Monday morning. Investors should expect the entire banking sector to remain volatile until the macroeconomic environment stabilizes.

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