UBS (NYSE:UBS) seems to be taking its plan to go back-to-basics quite seriously if recent reports that highlight the banking group’s interest in GE’s (NYSE:GE) Swiss consumer lending business are to be believed.  The largest Swiss bank is reportedly vying for Zurich-based GE Money Bank Switzerland in a move to strengthen its existing retail & corporate banking business.
Such plans would be another big step towards UBS’s goal of reducing its focus on investment banking to generate revenues by building up its wealth management and retail banking businesses – especially after the bank’s decision to slash 10,000 jobs across the organization just months ago (see Poor Performance Forces UBS To Announce Drastic Job Cuts). UBS’s shifting focus out of investment banking – largely because of strict capital requirements laid out by Swiss regulators and due to poor performance in the recent past – has made it important for the bank to look for growth opportunities that can make up for the considerable decline in expected revenues.
We maintain a $15 price estimate for UBS, which is about 10% below current market prices.
- How Has The Total Size Of M&A Deals Closed By Major European Investment Banks Changed In The Last 5 Quarters?
- What Was The Total Size Of M&A Deals Closed By Major European Investment Banks In Q1?
- How Have Debt Origination Deal Volumes For European Investment Banks Changed In The Last 5 Quarters?
- What Was The Share Of European Investment Banks In Global Equity Underwriting For Q1 2016?
- How Have Equity Underwriting Deal Volumes For European Investment Banks Changed In The Last 5 Quarters?
- What Was The Share Of Major European Investment Banks In Global Debt Origination Industry For Q1 2016?
Our analysis of UBS shows that its retail & corporate banking operations contribute to nearly a quarter of its value – almost the same amount as its trading business (fixed-income and equity combined). It would hence make perfect sense for the bank to add to its retail banking business to compensate for a planned decline in its trading business. The switch has its obvious trade-off though – while the retail banking business cannot compete with trading in terms of revenue generation capacity, it wins hands-down when it comes to stability in revenues. And in the aftermath of the $2.3 billion loss linked to unauthorized trades that the bank took last year (see Questionable Risk Controls Cost UBS More than Rogue Trades), its decision to shun the volatile trading business for a more steady top-line growth comes as no surprise.
GE’s decision to do away with non-core assets like the GE Money Bank Switzerland business, hence, comes at the right time for UBS. According to GE Money Bank Switzerland’s annual report for 2011, the business had CHF 3.96 billion ($4.27 billion) in outstanding loans at the end of last year.  The business operates out of 25 branches across Switzerland and has around 700 employees. It is currently valued at around CHF 1.5 billion ($1.6 billion).
One would expect UBS to be eager to acquire the business also because of its negligible presence in the Swiss consumer lending industry dominated by its competitor Credit Suisse (NYSE:CS) along with GE Money Bank. Such an acquisition will immediately make it the leader in the industry while adding to the total outstanding loan volume for its retail & corporate banking business. UBS would also expect cost synergies from the addition of GE Money Bank’s branches to its vast branch network as it would be able to cut down on various back-end and administrative costs.Notes:
- Exclusive: UBS to bid for GE’s Swiss lending unit – sources, Reuters, Dec 4 2012 [↩]
- Annual Report 2011, GE Money Bank Website [↩]