2023-11-10 07:30:00 ET
Summary
- UBS Group reports mixed results for 3Q 2023, with high revenue growth but negative pre-tax and net profits.
- Credit Suisse integration continues to impact UBS, with further relevant expenses expected.
- Despite the challenges, UBS's departments across all regions are performing well and the stock is not overvalued.
UBS Group (UBS) has recently reported its 3Q 2023 earnings. Although the total net loss was well above the analysts' estimates, the bank's stock gained on the day the earnings were announced. True, the operating performance and revenues improved. However, the net loss attributed to Credit Suisse was higher than many market participants had expected.
UBS Group 3Q 2023 results
So, to summarize, the quarterly results of UBS were the following:
- Total group revenues were $11.7 billion, an increase of 23% from $9.54 billion in the second quarter.
- CET1 capital ratio was 14.4%, exactly the same as in the previous quarter.
- Credit Suisse Wealth Management earned positive net new money inflows for the first time since Q1 2022, adding up to the inflows of $22 billion for UBS Global Wealth Management.
Analysts at Citi noted that the $844 million underlying profit before tax was well above the bank's guidance. The quite high figure was mostly due to the fact the operating expenditures decreased.
However, the most unpleasant parts of the story were the negative profit before tax and the net loss of $(0.8) billion.
At the same time, this was due to the costs related to Credit Suisse's integration. However, according to UBS management, the CS Wealth Management department's quarterly net new money has now turned positive for the first time in a year and a half. It totaled $3 billion in 3Q 2023.
Notably net new money was positive in all the regions of UBS's operations, These were particularly strong in APAC. Net new fee-generating assets at UBS were also strong totaling $21 billion, representing a 6% annualized growth rate. The bank also won $33bn of net new deposits across the general wealth management and personal & corporate banking coming from Credit Suisse clients. So, as noted by the management, the underlying performance across wealth management, asset management, and the bank's personal and corporate banking in Switzerland improved significantly. They grew on a quarter-on-quarter basis. Only the investment bank division did not quite excel.
The investment bank recorded an underlying loss of (0.1) billion mostly due to the need to integrate Credit Suisse.
Compared to the previous quarters, 3Q 2023 was excellent in terms of revenue but poor in terms of operating expenses and net results. The integration of Credit Suisse in June this year did not affect the 2Q 2023 results but affected the 3Q 2023 results instead. The process is not over yet. So, the effect of this merger will keep influencing the bank's operating results for a while.
Credit Suisse story
In June this year, UBS's takeover of Credit Suisse was completed. It was clear from the beginning that UBS would face quite high expenses due to its closest rival's integration. Here is a recap of my previous article .
Obviously, not all of Credit Suisse's assets acquired by UBS were free of problems. Before the acquisition Credit Suisse's foreign branches were loss-making.
This was due to the fact that UBS did not fully evaluate Credit Suisse's assets and liabilities before executing the acquisition deal. So, some of Credit Suisse's assets can still potentially mean problems for UBS. Earlier on I used to be bullish on Credit Suisse but fully admitted the problems it had. One of the strongest branches the bank had was its Swiss office.
The relevant direct and indirect costs of this acquisition might obviously be higher than expected. Many lawsuits have already been filed. Among them are the lawsuits brought by lawfirms Quinn Emanuel and Pallas .
I also mentioned the difficulty maintaining and motivating employees because UBS is actively cutting jobs . Some Credit Suisse's members of staff were retained by UBS but many of them were made redundant, which is not great in terms of personnel management.
My investment thesis still remains intact.
Risks
The risks are obvious even though the bank is large and actively growing its revenues. Obviously, the Credit Suisse takeover allowed UBS to increase its asset base. But there are also relevant problems. Not to mention there could be diseconomies of scale. The integration of Credit Suisse might keep influencing UBS's financial performance for a few consecutive quarters. Other risks are more general. These include the risk of a recession and the resulting depreciation of various asset classes held by the bank and its clients. The fact that many central bankers now seem to be more dovish is not very good for the banking sector. Generally speaking banks are most profitable when the interest rates are high rising.
It seems obvious that Mr. Market has already factored in the advantages of Credit Suisse's integration. I am saying this because the bank's stock price is quite high right now compared to where it used to be a couple of years ago. The recent quarterly earnings were also taken as a great success but I would say they were rather a mixed bag.
UBS stock valuation
Although the stock price is near its all-time highs, the stock valuations are not very high.
This is due to the fact the profits, revenues and cash flows have been quite high for a while. This is reflected by the relatively low price-to-earnings (P/E) ratio.
But other indicators, including the PEG, P/B and Price/Cash Flow ratios suggest just the same.
Most of them are historically low.
So, the stock is not too overvalued despite the fact its stock price is near multi-year highs.
Conclusion
UBS reported a mixed bag of results, negative pre-tax and net profits but high revenue growth. Further losses from Credit Suisse's integration are highly likely ahead. The bank is actively growing its revenues, most of UBS's departments across all regions are doing very well. The stock is not overvalued but the acquisition of Credit Suisse and the outside factors might negatively influence UBS in the future.
For further details see:
UBS: Mixed Q3 Earnings, Hold