The New UBS Embraces Shareholder Value
The share price of Switzerland’s largest bank seems to know only one direction right now – and that is up. If nothing else, shareholders benefit from the Credit Suisse takeover while everyone else looks on.
Sergio Ermotti doesn’t have any time for nostalgia. At least that is what he said extremely clearly at the news conference this past Thursday when announcing the full integration of Credit Suisse’s domestic business.
UBS’s CEO has his eyes set on the road ahead, and he is focused on the next key milestones of integrating what was once Switzerland’s second-largest bank. The two legal entities are set to be merged in 2024, with the Credit Suisse brand disappearing completely a year later. By 2026, UBS expects to reap cost savings of $10 billion dollars annually on a 15 percent return on equity.
The bank’s current focus is being applauded in one specific place. The equity market. On Thursday, UBS’s share price was up as much as 6 percent, and right now they are at 23.60 francs. Since the takeover was announced in March, the shares are up by a third, and at this level, they are trading at a price-to-book level of 0.99, or just below intrinsic value.
That has prompted chart technicians to rather excitedly point out that the bank’s price has escaped what had been a price corridor below 20 francs, something that has not happened for years. Moreover, a majority of analysts are now recommending UBS shares as a buy.
Kian Abouhossein is one of those analysts. The highly watched JP Morgan analyst has been a fan of the takeover from the start given that for him and others it means that UBS will be a future wealth management juggernaut. In a recent report, he indicated he expects significantly enhanced earnings strength, with the return on equity targets indicating that the future UBS sees a net profit of about $12 billion for 2026.
It is an ambitious target from our point of view, the analyst maintains. But he is confident that UBS will be able to manage it, and he believes UBS’s share price could be at 27 francs by the end of 2024.
All this underscores that UBS shares, which haven’t moved much for years, have again fallen in favor, at least with investors. Much of that is likely due to the fact that bank management under Ermotti has put a strong emphasis on that specific group of stakeholders.
“By 2026, UBS expects to reap cost savings of $10 billion dollars annually on a 15 percent return on equity.”
There is nothing all that surprising about that in an institution listed on an exchange with its shares widely held by a large variety of investors, both retail and institutional. Still, the tone has changed from the days after the takeover when Ermotti announced in June at an industry forum that the social impact of the takeover had to be factored in.
At the time, he said that UBS wanted to satisfy Switzerland, clients, and employees.
There was little talk of that last Thursday. Instead, much of what was on offer was cold and clinical business reasoning. UBS had closely evaluated the option of keeping Credit Suisse’s domestic business as an independent entity but concluded that it would be afflicted by marginal profitability and a lack of scale.
The best solution is a full integration into UBS for stakeholders and the Swiss economy, Ermotti maintained.
But it is more than reasonable to be skeptical about all that given the job cuts that are expected to come down the wire, not to mention the necessity of transferring the assets and portfolios of tens of thousands of Credit Suisse clients. At this point, redundant former Credit Suisse employees are expected to be left with the enhanced social plan while clients have to hope that the process will be implemented as smoothly as possible.
There has been criticism about the bank’s current tack to focus its efforts on future profitability. «The only things that speak for an integration are efficiency gains and higher profit», Sandro Schmid maintained recently. Bank consultants and risk professionals believe a full and complete integration is risky and extremely expensive.
But UBS and CEO Ermotti have chosen to focus on the needs of shareholders, something that comes much easier after the voluntary termination of the government’s federal loan guarantees. In an interview in the domestic media, Ermotti indicated that the bank and shareholders were still holding the risk when it came to the integration of both institutes. And there would only be a profit if this was completed well.
By that token, at least when it comes to shareholder value, the priorities seem to be in the right place.
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