UBS' 2024 costs in focus as group enters 'pivotal' year for Credit Suisse revamp

UBS Group AG is facing a cost challenge in 2024 as it integrates most of Credit Suisse Group AG's businesses into its own structure by the end of the year.

Closing down a multitude of Credit Suisse legal entities, retiring thousands of IT applications and transferring data to its own systems is expected to leave UBS with a hefty restructuring bill. CEO Sergio Ermotti has dubbed 2024 a "pivotal" year during which costs associated with the integration are expected to be highest.

To manage, UBS must cut ongoing operational costs, continue winding down Credit Suisse's noncore operations at pace, and also aim to grow revenues in 2024, analysts said. Consensus estimates point to an expected increase in UBS' noninterest expense in 2024 compared to 2023, although revenues and profits are also set to improve. UBS took over the struggling Credit Suisse in March in a deal pushed through by Swiss authorities.

While third-quarter 2023 results show encouraging signs that Credit Suisse-related risks are receding, key challenges remain, Anna Lozmann, a lead European banking analyst at S&P Global Ratings said.

"We continue to regard [UBS'] performance targets as ambitious and continue to see material execution risks, uncertainty regarding the combined entity's future franchise strength, and exposure to litigation risk as a result of the integration," Lozmann said in a written comment.

Ratings, which has a negative outlook on UBS, will keep a close eye on milestones the group has set for 2024, including the integration of significant Credit Suisse subsidiaries and the first wave of client migration to the core business of the merged group, Lozmann said.

2024 priorities

UBS aims to generate more than $10 billion in gross cost savings by the time it completes Credit Suisse's integration at the end of 2026, with half of the cost reduction coming from efficiencies achieved through the legal merger of key Credit Suisse entities in 2024. The group's main focus this year is to "decommission" the parent entity, Credit Suisse AG, and merge the Swiss and US-based businesses of UBS and Credit Suisse, UBS Chair Colm Kelleher said.

"That will then allow us to tackle this issue of cost," Kelleher said at a conference last November.

So far, the bank has over-delivered on cost savings, having achieved its $3 billion target for full year 2023 by the third quarter of the year. Yet the group has also flagged nearly $4 billion in integration-related costs for 2023, booking $2.73 billion for the second and third quarter, and projecting more than $1 billion in costs for the fourth quarter of the year.

Cost management in 2024 is among the key priorities for UBS, according to analysts, as it would determine how quickly it could deliver on targeted synergies from the deal and how soon it could resume share buybacks, which are currently suspended due to the integration.

Apart from keeping tabs on restructuring and operating costs, "we will also look closely at any communication regarding future shareholder distributions," Morningstar equity analyst Johann Scholtz said in an emailed comment.

If the merger of the main legal entities "proceeds at speed" and is completed before the end of 2024, UBS may resume buybacks as early as the second half of the year, Morgan Stanley analyst Giulia Aurora Miotto said in a research note after UBS' third-quarter earnings release in November 2023. A "meaningful pick up in cost savings" is also expected upon completion of the legal entitles' merger, the analyst said.

Future goals

Reaching the desired level of cost savings will help UBS bring its cost-to-income ratio down to 70% and boost return on common equity Tier 1 capital (RoCET1) to 15% — targets the group has set for the end of 2026 when it completes the Credit Suisse integration. Both metrics dropped after the acquisition of Credit Suisse, which was agreed in March and came into effect in June 2023.

UBS is expected to give more details on 2024 integration costs and measures to boost underlying performance in a three-year strategic plan to be announced at its next earnings update in February.

While analysts are largely positive on the long-term outlook for the group, expectations for near-term performance are riddled with uncertainty given the high execution challenges in what is the first merger of two global systemically important banks.

"UBS has very limited downside to the deal," Firdaus Ibrahim, senior equity analyst at CFRA Research said in an email. "That said, we remain on the sideline at the moment as there is still a long way to go to 2027, which will be the first EPS accretive year of the enlarged UBS group."