Recovery in Wealth Management to Support UBS

UBS (NYSE:UBS) is a financial services firm that offers a strong combination of wealth management, asset management and investment banking services on a global and regional basis. The Wealth Management division accounts for about 48% of the $19.30 Trefis price estimate for UBS’s stock, which is about 8% ahead of the current market price. We estimate that the asset management division of UBS constitutes around 7% of its stock price. The wealth management division of UBS competes with of other banks like Credit Suisse (NYSE:CS) and Morgan Stanley (NYSE:MS).

The total Assets Under Management (AUM) for the wealth management division of UBS was $1.34 trillion in 2009, as compared to $840 billion for Credit Suisse and $1.56 trillion for Morgan Stanley. The Wealth Management division for UBS is divided into three main regions, based on assets managed for clients in those regions. These are – Swiss Clients, Americas Clients and International Clients (i.e. clients other than Swiss and Americas). We discussed the growth in Asia as key driver to the stock in a past article: UBS Wealth Management is Key Driver to Stock Price.

The asset management division provides retail investors with a full range of mutual fund and alternative investment products, and institutional clients with a fully integrated asset management offering. On the other hand, wealth management serves the needs of high net-worth individuals as well as institutional investors with full range of financial services.The above bar chart compares the change in wealth management assets for UBS, Credit Suisse and Morgan Stanley between 2006 and 3Q 2010. Though strong global economic growth fuelled an increase in the assets managed by these firms in 2007, they saw a significant decline in their assets managed in 2008, due to the global financial crisis. However, with global economic environment improving in 2009, these firms have again managed to increase their assets largely due to an increase in risk appetite and investment activity by clients, a consequence of returns across most major asset classes improving. Morgan Stanley in particular has been scaling up its wealth management operations, expanding its business significantly and entered into a joint venture with Citi’s Smith Barney, which should help growth this business further.

We estimate Swiss Clients to be most valuable for UBS, contributing around 23% to its stock price with International clients and Americas clients contributing 21% and 3% respectively. This is largely due to the fact that the fees as a % of wealth management assets are much higher for Swiss clients.

The low contribution of Americas clients is largely due to the much lower operating margins for this division as compared to operating margins for Swiss and International. This is due to much higher personnel expenses as a % of revenues generated from Americas as compared to Swiss and International. Americas has a much higher client advisors to clients ratio than the other regions. This may be due to the fact that though UBS is well established in Europe and Asia, it faces much more competition in the US, where the industry is more fragmented with the presence of a large number of boutique wealth management service providers.

The Wealth Management Americas Operating Margin decreased from 10% in 2006 to -13% in 2008, largely due to a fall in revenues from the Americas region during the economic downturn. However, with the economic environment getting slightly better in 2009, the Wealth Management Americas Operating Margin increased to 1% in 2009.

Going forward, as the economic environment further improves, and the revenues from this region picks up, we expect the Wealth Management Americas Operating Margin to gradually increase to around 7% by the end of the Trefis forecast period. However, if the Wealth Management Americas Operating Margin improves to the levels for Swiss and International Clients by the end of our forecast period, there can be an upside of around 18% to our current price estimate for UBS’s stock price. This can occur if UBS is able to acquire more market share in the region as well as increase its operational efficiency. This would enable it to increase its revenues as well as reduce costs of operations. However, such a scenario remains difficult. A more plausible scenario can be an increase in Wealth Management Americas Operating Margin to 20% by the end of our forecast period, thereby providing an upside of around 8% to our current price estimate for UBS’s stock.