UBS political troubles are an opportunity

UBS is the largest Swiss bank and, with around $5.5trn in invested assets at the end of December 2023, is also one of the world’s largest asset managers. UBS is the result of a number of bank mergers in the last hundred years. The latest emergency take-over of its biggest Swiss peer Credit Suisse, initiated by the Swiss government, is therefore a good fit with this history. UBS’s position as a big global wealth manager is not least due to Swiss banking secrecy and Switzerland’s reputation as a safe haven for assets. The backbone of Swiss banks is the highly-profitable private client business, and this is also the case for UBS. 
Besides wealth and asset management, UBS also operates a global investment banking business. Due to the large losses in investment banking, equity attributable to shareholders decreased by 68% to CHF16.4bn at March-end 2008. UBS returned to profit in FY10 after three loss-making years. The Investment Banking unit (IB) had to reduce RWA dramatically as higher Basel III requirements had weighed negatively on profitability from 2013 onwards. UBS reduced the RWA share of investment banking from 60% (2011) to 30% and a 25% profit contribution to group pre-tax profit in 2015. One question remains unanswered: why does UBS need a risky, expensive and low-profitable investment banking unit compared to its other profitable business units? The fall of Credit Suisse makes this question even more urgent. UBS has undertaken to run down the Investment Bank unit of Credit Suisse and to limit the share of the Investment Bank unit of UBS to 25% (excluding non-core assets of new internal bad bank). We will see.
Investors have bought into this success story as the outperformance of UBS compared to the market (STOXX 600) over the last 24 months has shown despite the dip on the Credit Suisse take-over in spring 2023. As of the 02/08 close UBS had lost 9% as markets went into panic mode. We regard this as an opportunity to jump into this Buy to Hold quality name.

UBS clearly outperformed the market despite CS take-over

Credit Suisse integration needs time and money

UBS took over Credit Suisse, the second largest bank in Switzerland, with a very similar business structure in 2023. In consideration of the unique circumstances affecting the Swiss economy as a whole, the Swiss Federal Council had issued an emergency ordinance (Notverordnung) tailored to this particular transaction. Most importantly, the merger was implemented without the otherwise-necessary approval of the shareholders of UBS and Credit Suisse to enhance the certainty of the deal. The deal closed in the Q2 23.
UBS is aiming complete most of the integration by the end of 2026. It is targeting gross cost reductions of around $13bn by then, compared to over $10bn before. Cumulative integration-related expenses are expected to be broadly offset by accretion-to-par effects of approximately $12bn related to fair value adjustments applied to amortised-cost financial instruments.
As part of the integration, UBS planned to simplify its legal structure, including the merger of UBS AG and Credit Suisse AG in 2024. Based on these plans, and excluding integration-related expenses and accretion-to-par effects, UBS aims to achieve an exit rate cost income ratio of less than 70% by the end of 2026, and to progress toward a 2026 exit rate return on CET1 capital of around 15% and has the ambition to achieve c.18% for FY2028.
UBS has reported five business divisions – Global Wealth Management, Personal and Corporate Banking, Asset Management, Investment Bank, Non-core and Legacy (NCL) and Group Items – separately since Q3 23. UBS has created a Non-core and Legacy business division, which will include Credit Suisse’s positions and businesses not aligned with the strategy and policies of UBS, such as the assets and liabilities of the Capital Release Unit (Credit Suisse) and the majority of assets and liabilities of the Investment Bank (Credit Suisse), Wealth Management (Credit Suisse) and Asset Management (Credit Suisse), as well as the remaining assets and liabilities of UBS’s NCL portfolio and smaller amounts of assets and liabilities of UBS business divisions that UBS has assessed as non strategic in light of the acquisition of the Credit Suisse Group. As of 30 June 2023, the positions that will be included in NCL represented approximately $55bn of risk-weighted assets (RWA), excluding operational risk RWA, and $224bn of leverage ratio denominator (LRD). About half of these RWAs is expected to run off by the end of 2026.
UBS had adjusted the balance between cash dividends and share repurchases from 2020 onward, with a greater weighting for share repurchases as compared with the prior years’ returns. UBS announced a dividend per share of $0.55 (~CHF0.51) for FY2022 compared to $0.50 for FY2021. UBS had intended to repurchase > $5.0bn of shares during 2023 but this programme was suspended due to the CS take-over. However, the progressive cash dividend policy was confirmed. UBS repurchased $5.6bn of shares in 2022. UBS announced a dividend per share of $0.70 for FY2023. It is looking to buy back up to $1.0bn in shares in H2 24 and expects to buy back more than $5.6bn (2022 level) in shares for 2026.

Too big to fail is a problem for Switzerland
The new UBS is much too big for small Switzerland (as was the old Credit Suisse). The Swiss banking rules have come into sharp focus since the collapse of Credit Suisse. The government has proposed a range of measures to strengthen its banking system including giving more power to banking watchdog FINMA. It is the proposal to increase the capital requirements that has worried the market most in our view. UBS would have to scale back its share buy-back plans due to potential higher capital requirements for UBS (estimated at up to $15 to 25bn).

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