In the current politically charged atmosphere, UBS CEO Sergio Ermotti is sticking to a fully equipped Credit Suisse in Switzerland for the time being. What are his real intentions?

In the run-up to the merger, there had been much speculation about the nature of the merger, not least among politicians. They got their answer today when UBS announced that Credit Suisse will continue to be run as a separate organization for the time being.

Swiss politicians want to have a say in the future shape of the banks, and parliamentary debate is rather heated because the new banking colossus is «too big to bail out».

Dangerous Threat

If the combined UBS were to slip into a serious crisis one day, the state could find itself forced to rescue the financial industry and stand by UBS with aid money significantly exceeding Switzerland's GDP.

Such astronomical amounts would significantly increase Switzerland's traditionally low level of public debt and bring it closer to a rate typically seen in highly indebted countries such as Italy.

Political Concerns

Given these economic threats, calls for a spin-off of Credit Suisse are just as popular in parliament as are higher capital requirements – and bonus caps for managers.

Concerns are also directed at the Swiss banking market where accusations are increasingly being heard that the combined UBS's dominance of the market will give it too much power.

Smart Play

In this politically charged atmosphere, CEO Sergio Ermotti can be heard pleading for a «fact-based» discussion without emotion, but his preference for an integration of Credit Suisse shines through.

It remains to be seen how far he will be able to push through his plan in the current political minefield. The decision to continue running Credit Suisse as a separate company under the management of Ulrich Koerner for the time being could prove to be a smart play.

Dual Mandate

By taking its foot off the gas pedal, UBS's top management is signaling to politicians it won't create any hasty facts. For Koerner, on the other hand, the task is likely to be twofold. Until a final decision is made, he must prepare full integration and spin-off scenarios for Ermotti.

Difficult Integration

In the case of integration, the potential is undoubtedly significant. UBS would not only have one less competitor in Switzerland, but it could also take over many attractive clients and knowledgeable employees from Credit Suisse.

But there are some implementation risks, including the complex merger of IT and the merging of two different corporate cultures. This variant is also likely to result in the loss of thousands of jobs in the financial industry, which could damage the reputation of the combined UBS.

Politically Appealing Spin-Off

UBS could earn an estimated ten billion francs by spinning off Credit Suisse Switzerland, perhaps through an IPO.

At the same time, a sale would calm the heated tempers of pro-regulation parliamentarians, as it would significantly reduce UBS's balance sheet. Given the political climate, this variant also has its charms.