What do you do once you've conquered the European region? Well, you go after the big boss: the USA. The Swiss Bank, UBS, has topped the European banking industry leaderboard for market capitalisation, just after HSBC. Its Q4 financial highlights speak loudly and clearly. Despite impressive accomplishments, UBS remains unsatiated. CEO Sergio Ermotti continues with plans to fully integrate Credit Suisse and foresees further expansions of its wealth management business in the US - a lever for revenue growth. Yet, hours after the earnings call on Tuesday, its shares slid almost 6%, revealing a significant gap between trading values and US rivals like Morgan Stanley’s book value and share multiples. Can it take on the massive players and achieve its American dream?
A look at the main highlights of UBS suggests strong growth and resilience. It reported a full-year net profit of $5.1 billion for 2024, reflecting robust financial performance. The company proposed a 29% increase in its dividend payout to $0.90 in 2024. This suggests a generally optimistic outlook from directors who anticipate future earnings growth and a commitment to progressive capital distribution, reinforcing the idea of stability. Volatility in the Investment Banking (IB) division is usually a concern for policymakers. Wide fluctuations in trading assets threaten returns and liquidity, often requiring more than careful strategy to mitigate downside deviation. Fortunately for UBS, it capitalised on volatility, as the upturns were generally in its favour. The Investment Bank unit reported an operating profit before tax of $479 million, compared to an operating loss of $190 million in the year-ago quarter.
Revenue boomed, in part thanks to President Trump, as ironic as it sounds. US businesses were spurred by optimism, and risk appetite grew. Asset management revenue grew by almost 5%, while wealth management quadrupled. Trump supporters would definitely smile at this. Expenses fell due to cost optimisation momentum resulting from the Credit Suisse integration, such as through its Chinese market system automated transfer. A total of $3.4 billion in gross cost savings was registered. However, analysts were starkly skeptical of the credit loss that accrued. Indeed, the growing loan portfolio of UBS, a good income source in the corporate banking division, carries significant credit risks.
Default costs, like with any other retail bank, taint the lovely picture. Did UBS’s balance sheet deliver like big boy Barclays? On the surface, with growth in tier 1 capital, it did. However, its composition of assets is an obvious red flag: securities and loans make up more than 50% of the value. We all know that this asset investment strategy triggered the crash of some notable financial institutions. Volatile investments can lead to massive unrealised losses, which can cause a panic spree among depositors. These slight fiscal vulnerabilities, however, do not fully explain its share price depreciation.
A significant threat looms over the ambitious bank. A threat that CEO Ermotti implicitly qualifies as unfair: increasing capital adequacy requirements. It is almost like placing a larger burden on a camel already carrying heavy loads through the endless desert. This is another depreciating factor of its stock market value. UBS has already proven its stack of capital availability. If it has enough capital to absorb the defeated Credit Suisse and still report a satisfactory CET1 turnover, it implies it has a good buffer to absorb unexpected losses and protect key stakeholders. Increasing the requirement would lead to additional costs for the bank when raising capital. This might interfere with the bank’s plan to expand its wealth management position in the US, as an increased portion of financing liabilities would have to be kept off as reserves.
In fact, it has even warned that its $3 billion buyback plan is hostage to the capital overhaul. The higher capital requirement is in line with the “Too big to fail” policy. Giant banks like UBS tend to leverage risky initiatives that expose them to substantial failure risk, of course, to produce beast returns. However, a stable financial system requires the continued operations of intermediaries, and hence the rule holds its place. The Credit Suisse integration poses transitional risks to UBS. And risk is a word that policymakers prefer to keep out of sight. This puts the European financial leader at a competitive disadvantage vis-à-vis arch-rivals JP Morgan and Goldman Sachs, who are likely to be favoured and protected by Trump’s deregulation regime.
UBS has come a long way since the 2008 crash, and that is inspiring. It retains accountability, employee empowerment, and client centricity. Yet, what is it that prevents it from overtaking the bulge brackets? Could it be the merciless credit regulations? Or its untapped US market potential? Regardless, the Swiss Prince will accrue long-standing benefits from the Credit Suisse rescue, and these should improve its current position. Whether that is sufficient or not, only time will tell.
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