UBS: Brought to below book?

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The bank is delivering a strategy for the post-crisis world. So why aren’t investors giving it more credit?

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At the beginning of December, UBS finally reopened its headquarters on Zurich’s Bahnhofstrasse after a refurbishment programme lasting more than three years. The bank trumpeted that the new-look ground floor “is client-oriented and reflects the values of UBS”.

On the executive floors above it, it is the value of UBS that is now causing concern. Under chief executive Sergio Ermotti, the makeover of UBS post-crisis started seven years ago.

He rebalanced the bank, focusing on a wealth management business that has reinforced its position as the only truly global private bank and has become an impressive acquirer of net new assets.

He shrunk the investment bank to fit both the wealth management business and to adapt to the post-crisis environment.

Perhaps most importantly of all, he created a model that matched the supposed desires of the investment community – less risky, sustainable earnings with consistent growth – and he delivered on it, quarter after quarter.

Sergio Ermotti
And yet UBS’s share price is on a shocking run – and has been throughout 2018. From a starting point of close to SFr20 ($20.21), by mid December the Swiss bank’s stock was languishing at under SFr13. The decline has been consistent throughout the year – it is not just due to wider market concerns that hit most bank stocks in the final quarter of 2018.

UBS was seen as one of the winners in global banking over the last five years. The market liked its model. Not surprisingly, it put a premium on its stock, which traded up to around 1.4 times book value.

Now, despite that consistent delivery and performance, UBS is trading at around par and on some days at a discount to book. That is after a third quarter in which the bank delivered year-on-year growth of 37% and delivered a reaffirmed strategy to investors that showed a clear path to continued strong cash generation that would deliver attractive capital returns to shareholders. How can that be so?

UBS insiders talk about being “caught up in the morass” of European banking woes.

“We’re still seen by the markets as a European bank, despite the global nature of our business,” say one senior executive.

Axel Weber, the bank’s influential chairman, says he is not too frustrated by the share price weakness.

“Our core businesses continue to perform strongly and we have excellent growth stories in regions such as Asia and the US,” he tells Euromoney. “We are focused on the long term here and our shareholders care as much about the dividend as they care for the share price.”

Wealth of course remains the beating heart of the UBS business. It surprised many when UBS finally merged its US business into the global platform to create one overall business. Some competitors doubt it will be able to deliver net new assets of $70 billion from ultra-rich US clients over the next three years, which it has set out to do.

“US clients want a credible foreign bank in wealth management and they want the added differentiation that UBS can provide as the only truly global wealth manager,” says Kirt Gardner, CFO.

One of the concerns is whether or not the US investment bank is strong enough to help drive existing clients to give a higher share of wallet to UBS – this is the primary goal, above attracting new clients, bankers say.

Yes, UBS has a crucially strong equities business in the US, but it might need to grow in areas such as FX, credit and rates, and needs to strengthen its corporate client solutions offering. But does it have the appetite to do so, especially now former investment banking head Andrea Orcel has left to become group chief executive of Santander?

And would shareholders and analysts stomach a renewed push into the area of business that brought UBS to its knees a decade ago?

UBS continues to be haunted by the alleged sins of its past. French prosecutors are seeking a fine of close to €4 billion for helping clients move money out of the country. UBS calls the claim “irrational” and is vigorously defending it.

In November, the US Department of Justice filed a lawsuit against UBS accusing the bank of causing investors to lose “many billions of dollars” on residential mortgage-backed securities pre-2008. Such claims continue to weigh on market sentiment.

In its investor update at the end of October, Ermotti announced some ambitious yet seemingly achievable goals. The new global wealth division would deliver pre-tax profit growth at the upper end of its 10% to 15% target range. UBS would improve efficiency by reducing the size of the much-criticized corporate centre and giving equity and cost allocations to individual business lines, giving more transparency to investors. The bank will also now report quarterly results in US dollars.

Through all of this UBS aims to deliver a return on common equity tier-1 capital of 17% by 2021, even as that capital level increases under strictures of the Swiss regulators. That ought to be enough to keep investors happy. But will it?