UBS Earnings: Stabilizing the Ship

UBS UBSG 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.

Guidance for the merged business was limited. UBS now targets a 15% return on common equity Tier 1 capital by 2026, which was also our midcycle profitability estimate before the announcement on Aug. 31. Another new target is the 70% cost-to-income target for 2026. Credit Suisse’s investment bank cuts are even deeper than we expected. UBS guides that it will run down Credit Suisse’s investment bank risk-weighted assets to only $9 billion, only 10% of what it was at the end of 2022, which we also view as a broad indication of cost-cutting.