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Credit Suisse Rolls Over Troubled UBS

By The Prince ⋅ February 14, 2008 ⋅  Email This Post ⋅  Print This Post ⋅ Post a comment

The Prince does admit that the typical Morgan Stanley v. Goldman Sachs v. JP Morgan commentary does get old.  Bloomberg today drew attention to another rivalry that doesn’t get as much attention in the U.S., the Credit Suisse v. UBS rivalry.  The Prince is trying to block out comparisons he wants to make to college football rivalries.

Basically, the jist of the story is that CS is earning more than UBS for the first time in 10 years mainly as a result of UBS’ missteps in the recent credit crisis and weakness is some of its main businesses.  CS was able to avoid the writedowns that forced UBS to report the biggest quarterly loss by a bank at 12.5bn francs.  The bank will give details about its loss on Valentine’s Day.

In the last year the investment banking unit at UBS has struggled.  Many attribute their poor performance to the departure of veteran rainmaker Ken Moelis.  Moelis setup a new firm by his name which is competing in LA with UBS LA.  He also took his top deputies with him and many of his ex-DLJ co-workers.  UBS has cut about 1,500 jobs in its securities business and probably still has a headcount that is too large given current market conditions.  UBS also has lower profit margins in banking than CS which will serve CS well if a slowdown in M&A is on the horizon or has already begun.  Private banking revenues have also not grown as fast as competitors in a business where UBS has normally been a standout.  IUBS is still the world’s largest asset manager.

Credit Suisse was going in gangbusters in 2007 with advisory roles on many of the largest sponsor related transactions.  Sponsors and Leveraged Finance had banner years at CS and are now considered among the top groups in the industry in these areas.  Even accounting for losses on leveraged loans the investment banking business had a wonderful year.  If you need more proof Credit Suisse was recognized as the "Global Investment Bank of the Year" in The Banker magazine’s annual Global Investment Banking Awards published in October 2007.  Credit Suisse also won three house awards, including Best Leveraged Finance House, Best High Yield Bond House^, and Best Convertibles House.  To lend more prestige to its investment banking division, in 2007 CS also ranked #6 and #4 in worldwide and U.S. completed M&A based on imputed fees.

CS also significantly brought down its mortgage and CDO exposure in the spring.  They historically were not a big player in mortgages or structuring so it is unclear how much exposure they initially had.  They were also early on seeing problems with origination.  In 2006 and 2007 the bank significantly reduced the amount of mortgage paper it issued.  It interesting to consider that First Boston (acquired by CS) along with Salomon Brothers were the original creators of the collateralized mortgage obligation a precursor to MBS and CDO securities and one of the most important financial innovations of the 1980s. 

The numbers simply speak for themselves.  UBS reported on Jan 30 it had a loss of 4.4bn francs in 2007 while CS is expected to post a profit of  8.65bn francs.

The trouble at UBS has caused the bank to seek shareholders’ approval to sell 13 billion francs in bonds that will convert to shares to investors in Singapore and the Middle East.  UBS stock is down 50 percent in the past twelve months, while Credit Suisse is down 36 percent.

Credit Suisse is certainly decimating UBS in investment banking globally and is growing its private wealth business faster.  Credit Suisse’s current fortune is surprising when you consider that this bank was in crisis as recently as 2002.