UBS to dispose of risky Credit Suisse loans to Asian clients

Two names, but – officially since June 12, 2023 – one entity. © Keystone / Ennio Leanza

UBS Group AG is planning to exit billions of dollars in loans to Credit Suisse’s clients in the Asia Pacific region, as the Swiss bank works to neutralise risks to its profitability and reputation from the defunct lender.

The bank intends to either wind-down or sell off the majority of Credit Suisse’s more complex and higher-risk structured loans in APAC, people familiar with the matter said. 

Those riskier assets will be placed in the so-called “Non-Core Unit” for businesses that UBS doesn’t want, the people said, who asked not to be named discussing private details. The bank is likely to keep less complicated loans made against liquid collateral – so-called Lombard loans.

Since closing the takeover in June, UBS has been scrutinizing the approximately CHF75 billion ($86 billion) book of loans made to rich clients globally. At its peak in 2019, more than CHF45 billion in loans to wealthy customers in its Asia Pacific unit were outstanding. UBS agreed to buy Credit Suisse in March in an emergency deal brokered by the government, after a confidence crisis and a torrent of client outflows sent it hurtling toward bankruptcy.

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About a quarter of Credit Suisse’s lending portfolio in its global wealth businesses is structured in nature, while about half of the book consists of lower-risk plain-vanilla Lombard loans.

The move is part of UBS’s broader efforts to make sure that the businesses it acquired from its stricken rival conform with its more conservative approach to risk. UBS has already said it plans to downsize Credit Suisse’s investment bank and put its bankers through a “culture filter” to weed out undesirable practices. 

More details on what will go in the wind-down unit are expected during the combined bank’s second-quarter earnings on August 31. UBS will wind down non-core assets in a way that also takes key relationships into account, a person familiar with the matter said. The process will also free up capital to use in other parts of the bank, the person added.

UBS declined to comment. UBS shares rose 0.1% to CHF19.275 in Zurich on Monday, having gained about 13.5% this year.  

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In scrutinising the loan book of the fast-growing Asian market, UBS Chief Executive Officer Sergio Ermotti faces a dilemma – how to continue to build on the UBS’s presence there while shielding the bank from hidden risks. The lender’s strategy still hinges on growth plans in the Asia Pacific region, alongside the US, one of the people said.

The APAC loans marked for exit include those in countries or business lines that UBS doesn’t want a presence in, where probability of default is too high, or where the risk thresholds are higher than what it would normally allow, another of the people familiar said. It also includes some defaulted debt, the person added.

Prior to the UBS takeover, Credit Suisse had pursued a decade-long push into South East Asia, where it lent to billionaire business families. 

That helped make Credit Suisse the go-to foreign bank for entrepreneurs, a status that could help boost UBS’s ambitions. Yet Credit Suisse’s client list in the region also includes individuals and companies that UBS may not want to do business with.

That set-up differed from Credit Suisse’s lending business to wealthy people in other parts of the world. In APAC, loans made to individuals and their businesses went hand-in-hand, and were more part of the same relationship with the bank than was common practice in other regions, people familiar said. 

It was under former Credit Suisse chief executive Tidjane Thiam in 2015 that a business division was specifically created to more effectively target hungry entrepreneurs. These clients were seen as a potential source of fees not only for the private bankers managing their growing wealth but also investment bankers who could help arrange equity investments or loans to help their businesses grow.

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As relationships with millionaires and billionaires in South East Asia deepened, Credit Suisse’s willingness to roll over and refinance debt rather than send defaulted loans to be worked out or restructured also increased, people familiar said. The bad-loan refinancing happened over many years and Credit Suisse benefited from the fees when rolling the loans over, the people said. 

In certain instances, Credit Suisse allowed some Indonesian clients to only repay interest on defaulted debt rather than the total outstanding, and the bank would extend the maturity of the loan, two of the people said.

Credit Suisse began to unwind some of the more complicated and risky loans after the various scandals of the last two years forced the bank to revamp its approach to risk-taking. Some clients used to leniency from Credit Suisse are now likely to face insistence from UBS that loans be paid or collateral handed over as it tries to eliminate inherited risks.