Company Reports

UBS reported net underlying profits in line with our expectations. The underlying results exclude the impact of the Credit Suisse integration, but UBS’ operating expenses remain inflated by Credit Suisse’s cost base. The rightsizing of the acquired Credit Suisse cost base will run until 2026. UBS confirmed its profitability target of a 15% return on common equity Tier 1, or CET1, capital by 2026. It, however, introduced a fresh ambition to achieve a return on CET1 of 18% by 2028.

UBS has managed to stem client outflows earlier than we anticipated. A significant positive development was the $22 billion of net new client inflows the consolidated wealth management business booked for the quarter—$3 billion of these inflows came from the legacy Credit Suisse wealth management business, and this comes after Credit Suisse lost $183 billion of its client assets over the previous four quarters.

The Credit Suisse takeover will be UBS' main focus for the foreseeable future. After the 2008 global financial crisis, UBS was in a similar position to Credit Suisse before its collapse. UBS' capital allocation was utterly lopsided, with 70% of its capital allocated to volatile, unprofitable investment banking activities. Over the next 15 years, UBS reduced the capital allocated to investment banking to 30% and shut down investment banking operations that did not support its core wealth management business. UBS halved its asset base and lopped 30% of its cost base while growing revenue. The consequent capital adequacy and profitability improvement allowed it to buy back 20% of its shares over the past five years. Now UBS will have to do this all over again.

UBS had delayed its results in June to allow more time to formulate a strategy around the integration of Credit Suisse. Accounting noise distorted the second-quarter 2023 results. UBS booked a massive $29 billion profit before tax, but excluding the negative goodwill from the bargain purchase of Credit Suisse, pretax profit was a more modest $314 million. The legacy UBS-only business performed well, although its investment banking business saw a sharp slowdown in revenue. Credit Suisse's business, even on a normalized basis, remained loss-making. Revenue for Credit Suisse declined by 38% compared with the first quarter of 2023 and its investment banking revenue collapsed completely. Credit Suisse's wealth management revenue held up reasonably well and we view the net client inflows recorded in the quarter as confirmation that UBS has managed to stabilize the situation, a major positive. The Swiss domestic business of Credit Suisse remained profitable with stable revenue. After much speculation, UBS announced it would retain Credit Suisse's domestic Swiss business rather than pursue a separate listing. The merged operations in Switzerland could deliver meaningful synergies over time, making this a positive development.

The 22% increase in our fair value estimate for UBS to CHF 27.50 is primarily due to the takeover of Credit Suisse, implying that we place a value of around CHF 19 billion on the acquired Credit Suisse operations. To contextualize our valuation, in February 2023, before the final collapse of Credit Suisse, the market still valued it at CHF 13 billion. As recently as March 2021, Credit Suisse had a market value of CHF 32 billion. We acknowledge that it will be hard, if not impossible, for UBS to reverse Credit Suisse's recent revenue losses. UBS is, however, much better placed than Credit Suisse to drastically reduce the loss-making, volatile, and capital-hungry investment banking operations and restore the profitability of Credit Suisse's wealth management operations.

The Credit Suisse takeover will be UBS' main focus for the foreseeable future. After the 2008 global financial crisis, UBS was in a similar position to Credit Suisse before its collapse. UBS' capital allocation was utterly lopsided, with 70% of its capital allocated to volatile, unprofitable investment banking activities. Over the next 15 years, UBS reduced the capital allocated to investment banking to 30% and shut down investment banking operations that did not support its core wealth management business. UBS halved its asset base and lopped 30% of its cost base while growing revenue. The consequent capital adequacy and profitability improvement allowed it to buy back 20% of its shares over the past five years. Now UBS will have to do this all over again.

UBS found itself in the strange place that Credit Suisse's April 24 earnings announcement was probably of more importance to UBS' valuation than its own results announcement. As crucial as the Credit Suisse takeover is, one should remember that the current UBS operations will dominate the combined entity. UBS reported robust annualized net client inflows of 6% of assets under management for the first quarter of 2023 and managed to retain deposit outflows within the group. We view these trends as supportive of our narrow moat rating.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

A week can be a very long time in financial markets. UBS acquiring Credit Suisse for CHF 3 billion a week ago would have seemed like a terrific deal. Now the position is less clear. Credit Suisse likely experienced significant net outflows of client assets last week, eroding its revenue base. We, however, believe that UBS can extract value from the acquisition. It is in a much better position to execute a radical restructuring of Credit Suisse's business than Credit Suisse was. We calculate that UBS' 2027 cost savings target would reduce Credit Suisse's 2022 adjusted operating expenses by around 60%. The restructuring will come with material costs, but UBS is better placed than Credit Suisse to absorb this. The challenge for UBS will be to keep revenue attrition to a minimum during the restructuring period. In a surprise move, the Swiss regulators wrote down the value of Credit Suisse's CHF 16 billion in additional Tier 1 capital to zero, providing UBS with additional capital to absorb markdowns and restructuring charges. In addition, the Swiss authorities will provide a further CHF 9 billion of downside protection. The combined CHF 25 billion of downside protection plus, if needed, liquidity support from the Swiss central bank should ensure that UBS' wholesale funding costs remain in check. The suspension of UBS' share-buyback program is negative, but it could have happened regardless, given current market conditions. We will update our fair value estimate for UBS shortly.

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

UBS' new 2%-3% operating expense growth guidance for 2023 stood out from its results call for fourth-quarter 2022. We believe it will be challenging to achieve revenue growth to offset this increase. Given UBS's high fixed-cost base, it has a very high degree of operating leverage, which will significantly magnify the impact of flat or declining revenue on its bottom line. We believe that investment banking revenue reached a cyclical high in first-quarter 2022 and that the normalisation we saw in the final quarter will continue into 2023. Higher net interest income should partially offset some of this decline, but the outlook for fee income from wealth and asset management remains constrained by market valuations. We do not foresee making a material change to our CHF 22.50/share fair value estimate for UBS. After a 22% rally in its share price over the last three months, we see limited further upside potential.

As expected, depressed market valuations continued to weigh on narrow-moat UBS’ results. Net profit of $1.7 billion for third-quarter 2022 was 24% below UBS’ net profit for the same quarter a year earlier, but it was comfortably ahead of the $1.5 billion consensus estimate of analysts polled by UBS. The continued strong net inflow of clients’ money into fee-generating assets managed by UBS was the main upside surprise in the results. We view the net inflows achieved during bearish market conditions as confirmation of UBS’ economic moat in its wealth and asset management businesses. After incorporating the latest results into our model, we increase our fair value estimate for UBS slightly to CHF 22.50/share from CHF 21.50/share previously. We maintain our narrow moat rating. With a 0.8 times price/fair value estimate we believe UBS continues to offer upside potential.

UBS was ahead of the curve in anticipating what a global private bank should look like in the post-crisis world, and its shareholders are benefiting from its early and decisive actions. UBS realised that some businesses have become less structurally attractive, and reduced its focus on investment banking while also eliminating legacy assets.

Narrow-moat UBS reported second-quarter profits before tax of $2,615 million, missing the consensus estimate for the quarter of $3,049 million as collected by the bank itself. Compared with the same quarter a year ago, profits before tax increased by 1%. However, this was helped by a gain on a sale worth $848 million. Excluding this one-off, profits dropped about 32% year over year. Lower market valuations and lower client activities have been the culprits for this poor performance. Net fee and commission income dropped $783 million, or 14%, driven by lower activity in the investment bank, asset management, and global wealth management. We maintain our CHF 21.50 per-share fair value estimate despite this weaker-than-expected performance in the quarter. We don’t believe the risk aversion displayed by many of UBS’ clients over the last quarter will be the new normal. A recovery will take a couple of quarters, but we believe the underlying drivers behind UBS’ growth story remain intact.

Narrow-moat UBS reported profits before tax of $2,729 million, 15% ahead of the $2,356 million consensus estimate collected by the group itself. The good performance is primarily explained by a strong performance in its investment bank, which saw operating income increase 28%. Higher revenue from equity derivatives, rates and foreign exchange all contributed positively and were only slightly offset by weaker capital market financing revenue. Other segments fell short of consensus estimates. Operating expenses came in at $6,634 million, 4% above what the group reported in the year-ago period. In sum, the group reported a strong return on common equity Tier 1 capital of 19.0%, ahead of its recently lifted medium-term guidance between 15% and 18%. We maintain our fair value estimate of CHF 21.50 per share.

UBS was ahead of the curve in anticipating what a global private bank should look like in the post-crisis world, and its shareholders are benefiting from its early and decisive actions. UBS realised that some businesses have become less structurally attractive, and reduced its focus on investment banking while also eliminating legacy assets.

Narrow-moat UBS booked a net attributable profit of $1.3 billion for fourth-quarter 2021, 18% lower than the $1.6 billion it reported for the same quarter in 2020. An incremental $740 million litigation provision for the French cross-border matter depressed results. The consensus of analysts polled by UBS expected net attributable profit of $863 million for the quarter. UBS increased its profitability target to a 15%-18% return on common equity Tier 1 capital, from 12%-15% previously. We have already been modelling midcycle profitability to be within the new range, so the new profitability guidance should not lead to a higher fair value estimate. However, UBS also indicated it plans to execute $5 billion share buybacks during 2022; we have built in only $2 billion in our model. We estimate the planned buybacks plus dividends imply a shareholder return of 10% of UBS’s market value during 2022. The higher-than-anticipated buybacks should lead to an increase in our CHF 19/share fair value estimate.

UBS was ahead of the curve in anticipating what a global private bank should look like in the post-crisis world, and its shareholders are benefiting from its early and decisive actions. UBS realised that some businesses have become less structurally attractive, and reduced its focus on investment banking while also eliminating legacy assets.

Narrow-moat UBS booked a net attributable profit of $2.3 billion for third-quarter 2021, 9% higher than the $2 billion it reported in 2020. A capital gain of $631 million inflated the 2020 third-quarter base, and the normalised increase was even more impressive. The consensus of analysts polled by UBS expected only $1.6 billion for the quarter--a 43% earnings beat. We increase our fair value estimate to CHF 19/share from CHF 16/previously on the back of these strong results. We maintain our narrow moat rating.

Narrow-moat UBS booked net attributable profit of $2 billion for the second quarter of 2021, compared with the $1.2 billion it reported for the second quarter of 2020. UBS smashed the $ 1.3 billion estimate of the consensus of analysts polled by UBS itself. We expect that we will increase our earnings estimate and our CHF 16/share fair value estimate for UBS on the back of these strong results. We keep our narrow moat rating.