2023-09-01 12:44:50 ET
Summary
- UBS will retain CS' Swiss commercial bank. This seems a positive development.
- The bank is moving on with Credit Suisse's integration and restructuring process.
- Record asset under management flow in the Wealth division. Solid CET 1 ratio, with a price-to-book value above peers. For now, we prefer to remain neutral.
Our most devoted readers at the Lab know we have been overweighting U BS (UBS) since April 2022 and neutral on Cr edit Suisse from January 2022 . While we decided not to cover any more Credit Suisse w ith a last publication titled " It Is Over ," for safety reasons, we were more concerned about UBS' valuation. In our most recent analysis from July, we resumed UBS' coverage with an equal-weight valuation , anticipating how the combined entity would be one of the world's largest asset managers, having increased its NAV by 70% in a single deal. However;
UBS was trading at 0.9x its tangible book value with a RoTE of 5.8%. If we incorporate $10.5 billion in cost reductions thanks to a sound restructuring plan and almost $14 billion in restructuring charges, we arrive at a RoTE of approximately 11% only in 2025. On a pre-acquisition basis, UBS Group AG traded at a premium price on its tangible book value at 1.3x with a RoTE of approximately 15%".
Today, we are back to comment on the quarterly performance, given that UBS just disclosed its combined numbers. Following the new plan and the latest financials (including one month of Credit Suisse integration), here are our main highlights and forward-thinking for an updated valuation:
- The Credit Suisse brand will disappear in 2025. Indeed, UBS will integrate the Swiss activities of the newly acquired company after an in-depth analysis aimed at creating shareholders' value. UBS and Credit Suisse's Swiss businesses will operate separately until the merger is legally closed in 2024, with the client's migration being completed (likely in 2025). This is critical news and supportive. As a reminder, last time, we emphasized how a Credit Suisse IPO related to the Swiss segment could have been more supportive. We were " more inclined if the business was retained. UBS might advance a restructuring plan with higher synergies to boost profitability metrics ";
- The group will now control $5 trillion in assets, a stake that leads UBS, already one of the largest asset managers in the world, to be a leader in key markets (Asia, EMEA, etc. - Fig 1). This AuM would have needed years to achieve the new inflow. Having this new scale, UBS might enhance corporate profitability. As a rule of thumb, it is common practice to value asset managers by deriving an equity value, multiplying 2% for the Asset Under Management; with $5 trillion in assets, UBS's valuation could exceed $100 billion vs. a current market cap valuation of $86 billion;
- UBS's acquisition of Credit Suisse for just 3 billion Swiss francs will eliminate 3,000 jobs in Switzerland in the coming years. Of these, 1,000 will be related to the integration of the Swiss bank, while the remaining 2,000 will be needed to implement a significant restructuring. The cuts are part of the bank's plan to reduce gross annual costs by more than $10 billion by 2026 (we previously forecasted $10.5 billion);
- According to Reuters , UBS is also downsizing the Credit Suisse investment arm. This reorganization affects more than just the APAC region and investment banking employees in the US. As a reminder, the Credit Suisse IB branch caused many profit warming over the years;
- We positively view UBS's new guidelines to avoid further complications. Many of CS's Russian clients will probably have to look for a new bank. The Swiss newspaper Nzz am Sonntag reported that UBS is considering cutting relations with 50%-75% of Credit Suisse's Russian customers. This decision aimed to safeguard and protect UBS' reputation;
- UBS reported a Q2 net income of $29 billion, including a negative $29 billion goodwill from Credit Suisse integration. Looking at UBS, the bank reported a $2.0 billion profit, which was a remarkable result. Accounts include just one month of Credit Suisse earnings, as the deal only closed in June, and this figure fell short of analyst consensus estimates that were forecasting a net income of $33.45 billion;
- Here at the Lab, the key to emphasis is the group's inflow development. Credit Suisse reported a net asset outflow of CHF 39 billion in the second quarter, noting that the bailout failed to stem the loss of confidence in its franchise. However, the capital outflows are slowing down from previous quarters and turned positive in June. UBS increased its AuM by $23 billion, of which $16 billion was thanks to the Global Wealth Management division, which recorded the highest second-quarter net new money in over a decade. To report is the fact that UBS is currently seeing a recovery in sentiment and transaction momentum among its wealth management clients. Looking ahead, we forecast positive net new asset flows into the wealth management and asset management businesses with rising asset valuations. This will favorably impact UBS' net recurring fee every year;
- In addition, UBS has already created a non-strategic asset division to lower the ongoing risk-weighted assets, simplify its structure, and likely to reduce litigation costs in a separate entity;
- UBS reported a solid capital position, confirming a CET1 ratio of 14.4% (Fig 2) and an LCR of 175% (Fig 3).
Source: UBS Q2 results presentation - Fig 1
Fig 2
Fig 3
Conclusion and Valuation
After the Q2 call, we are more optimistic about the combined entity. UBS's results highlight two key aspects: the success of the Credit Suisse acquisition and the decision to maintain and integrate the bank's Swiss operations, allowing UBS to take advantage of its larger size and competitive leadership in its domestic market. UBS now plans to achieve $10 billion in cost-saving initiatives; however, the combined entity target is to deliver a cost/income ratio just below 70%. The current cost/income ratio is at 88%. If we compare this ratio with other banks, UBS needs more efficiency. The CET1 ratio rate is forecasted at 15% by 2026, with many EU banking already in this range. While other banks are valued with a Price-to-book value of 0.8x, UBS' current book value stands at $24.61 per share vs. a current stock price of $26.65. Therefore, UBS is valued above its peers' average with a PBT of 1.08x. We confirm our DPS projection of $0.65 with a 2024 yield of 2.4%. This number is well below competitors. As mentioned last time, we see cheaper opportunities elsewhere, with other EU bank valuations more attractive. You can check ISP, UniCredit, CASA, and BNP Paribas within our coverage. Going back to UBS, given the complex internal scenario, we decided to maintain a neutral rating target.
For further details see:
UBS Q2: First Month With Credit Suisse, Turning More Positive