Swiss fix?

16 November 2011 By Margaret Doyle

JPMorgan analysts have suggested the lenders combine their investment banks. It would boost returns, speed balance sheet shrinkage, and might pass muster with regulators wary of cross-border deals. But while consolidation is welcome, combining the arch-rivals would be tricky.

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Analysts at JPMorgan suggested on Nov. 8 that UBS and Credit Suisse combine their investment banking arms.
The proposed joint venture of Switzerland’s two global banks could reduce their combined risk-weighted assets by 47 percent. The smaller balance sheet would allow the banks to release capital and would boost return on equity at the venture to 20 percent.
At that level of profitability, JPMorgan reckons that the new bank could fund itself in wholesale markets. JPMorgan reckons that the new joint venture would have to pay 156 basis points more for debt finance than the two groups do currently. Assuming it had to pay that premium, the return on equity would fall to 16 percent.
The new business would be radically shrunk, laying off 13,000 staff, or 38 percent of the combined investment banking workforce, and saving costs of 7.5 billion Swiss francs a year.

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