UBS finalizes $10 billion deal with Swiss government on Credit Suisse losses

UBS has finalized a deal with the Swiss government that will provide for the rescue of Credit Suisse to protect the bank from losses of up to SFr9bn ($10bn).

The loss protection agreement is the final hurdle UBS must overcome before completing the takeover early next week.

In talks with Swiss authorities to save its rival Credit Suisse in March, UBS persuaded the government to contribute up to SFr9bn to cover losses the bank would incur in closing unwanted assets.

Government aid will begin after UBS covers the first SFr5bn losses.

“UBS will manage these assets in a prudent and diligent manner and intends to minimize any losses and maximize value realization on these assets,” the bank said on Friday.

“It will also cover the initial and ongoing external costs incurred by the confederation and FINMA for (the loss protection agreement).”

The rescue of Credit Suisse, which was engineered by Swiss authorities, is expected to be the most significant and complex banking merger since the financial crisis.

The size of government support for the deal – which also includes a SFr100bn liquidity line – and the prospect of job cuts and branch closures in Switzerland have drawn criticism domestically.

A poll published shortly after the deal was announced showed that three-quarters of voters wanted the megabank to be split.

A month later, Swiss lawmakers voted against the government’s SFr109bn financial package, outlawing the deal in a symbolic protest.

Last month, the country’s left-leaning Social Democratic Party said it had drawn up a plan to halve the bank’s post-merger balance sheet, bringing it down from SFr1.5tn to close to SFr734bn of the country’s gross domestic product.

UBS executives are having trouble showing investors that they will try to limit their reliance on the state and avoid using government support. Recently returned chief executive Sergio Ermotti has insisted that it is “extraordinarily impossible” for Swiss taxpayers to take a loss on the acquisition.

As part of the agreement, UBS will pay the Swiss government SFr40mn to set up the guarantee, a SFr36mn annual maintenance fee while it exists and interest on the money it uses, which ranges from 0.4 per cent to 4 per cent, depends how much is pulled down.

On Wednesday UBS confirmed reporting from the Financial Times that it would push back its second quarter results from July 25 to August 31 in recognition of the complex task of bringing the two accounting frameworks together.