Performance woes continued for UBS (NYSE:UBS) in the third quarter as the existing problems of declining revenues and bloated expenses were aggravated by a one-time goodwill impairment loss of CHF 3 billion ($3.2 billion) and an accounting charge of CHF 863 million ($925 million) resulting in pre-tax losses of CHF 2.5 billion ($2.7 billion) for the period.  With stakeholders already raising concerns about the bank’s business model and capital strength in recent months, dismal figures this time around forced UBS to announce sweeping changes to cut costs and free up capital from its various operating units. 
We increased our price estimate for UBS marginally from $14.20 to $14.70 due to expected improvements in margins from the proposed cost-cutting measures (including a reduction of 10,000 jobs) that are already underway. The update also factors in a slower expected growth in the bank’s trading assets over the years to come as it exits several investment banking business lines. Our new price estimate is at a premium of about 10% to current market prices.
Investment Banking Business Lone Reason To Cheer
UBS’s investment banking business actually performed better than it did last quarter once the impact of the accounting charge related to a revaluation of its own debt is removed. Notably, UBS churned out nearly three-times the revenues it did from equity trading this quarter than it did in Q2 2011, whereas its debt trading revenues remained at essentially the same level as that over the previous period. This is unlike the case witnessed in all its competitors like Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB) and Morgan Stanley (NYSE:MS) who posted considerable growth in their debt trading business for the quarter which saw a marked improvement in the debt markets from growing optimism on recovery plans for the Eurozone and the prospect of a sustained US economic recovery.
It comes as little surprise that UBS is looking to cut down various parts of its fixed-income trading desk over the coming quarters. Poor returns coupled with high capital requirements makes various fixed-income units ideal candidates for downsizing or complete exits.
Focus To Shift On Wealth Management Going Forward
UBS has decided to go back to its roots – putting its money into wealth management over coming years in a bid to anchor its business model on the stable business. While the bank’s unmatched expertise in the field and the proposed cost-related metrics are a major plus for the business, the bank should be looking to expand its global footprints to make up for the anticipated loss in assets under management from developed countries owing to the various tax-agreements signed by Switzerland.
Notably, revenues for the largest Swiss bank’s cornerstone wealth management business, asset management business as well as retail & corporate banking business all stagnated this quarter despite considerably better global economic conditions compared to last quarter.Notes:
- UBS’s third-quarter 2012 results, UBS Press Releases, Oct 30 2012 [↩]
- UBS announces strategic acceleration from a position of strength, UBS Press Releases, Oct 30 2012 [↩]