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Onwards not upwards

30 April 2013 By Dominic Elliott

The new-look UBS is starting to deliver. The first full quarter of the strategy announced on Oct. 29 has broadly answered the Swiss bank’s critics. UBS shone in trading and capital markets financing, returning to its traditional strength in equities. Investment bank stability helped wealth management business too.

UBS’s Tier 1 Basel III capital ratio of 10.1 percent conveys more solidity than most rivals. Wealthy individuals have noticed. Having flatlined for quarter after quarter, the growth rate for net new money ticked into double digits in Asia, Latin America, Africa and Eastern Europe. The biggest rise in growth came from ultra high-net worth investors.

The investment bank’s back-to-basics strategy is also showing early signs of promise. Pretax profit in the division doubled to just shy of 1 billion Swiss francs from a year ago driven largely by equity trading and financing. UBS also held up well against its peers in foreign exchange and rates – the main areas of fixed income trading the bank has stuck with amid a general retreat from that business.

The snag is that this is pretty much priced in. UBS shares are trading at 1.2 times book value after a 37 percent rise in shares since the end of October. While its strategy is looking increasingly convincing, UBS has yet to prove it can make the kind of returns to justify that.

The revamp is far from done, and won’t proceed in a straight line. A 5 billion franc rise in investment banking risk-weighted assets, to 69 billion francs, is still within the bank’s own self-imposed limit of 70 billion francs. But any further rises would raise questions about its commitment to dialling down risk. There is still the potential for losses from the winding down of UBS’s sizable non-core portfolios.

Cost pressures in investment banking also persist – business head Andrea Orcel has had to open the cheque book to secure top talent after UBS’s recent troubled history. In time, they might turn the tide in M&A, where revenue was down 33 percent to 114 million Swiss francs year on year. The bank’s U.S. advisory business needs particular attention, after defections over many years to large competitors and boutiques like Centerview, Jefferies and Moelis.

UBS is moving on from the days of multi-billion dollar write downs. Investors – and potential recruits – may see a virtuous circle starting to form. But management will need to post a string of decent quarterly results to give the shares another leg up.


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