Shares of the Swiss banking giant UBS (NYSE:UBS) have tanked 9% within two days of its announcing performance figures for the third quarter on Tuesday.  The results in themselves weren’t to blame here, as the difficult economic conditions prevalent over the quarter and the string of poor performances reported by other banking giants over the last few weeks had already lowered investor expectations from the largest Swiss bank.
However, what caught investors off-guard was the bank’s accompanying statement that it has been directed by the Swiss financial regulator FINMA to temporarily raise its operational risk-weighed assets (RWA) figure by 50% so that the bank has additional capital buffers to cover “known or unknown litigation, compliance and other operational risk matters.” This new rule will push UBS’s operational RWA figure by CHF 28 billion ($31 billion) – reducing its fully applied Basel III Tier-1 common capital ratio by 30 basis points (from 11.9% to 11.6%). The bigger impact of this new capital requirement is that UBS will not be able to achieve the 15% return on equity target it set for itself by 2015 – likely delaying the profitability goal by a year.
We believe that the temporary capital requirement does not undermine UBS’s strong Basel III readiness materially, and also does not pose a risk to its long-term value. We, hence, stick to our $21 price estimate for UBS’s stock, which is less than 10% ahead of the current market price.
The Equities Trading Desk Failed To Replicate The Stellar Performance It Put Up Over H1 2013…
UBS made a drastic change to its investment banking operations last year by announcing plans to reduce its fixed-income trading business to a fraction of its former size by slashing no less than 10,000 jobs. The move put the onus of driving the top-line on the bank’s equities desk, which actually lived up to its expectations over the first two quarters of the year by generating CHF 1.1 billion ($1.2 billion) in revenues each quarter.
But this figure fell by 20% in Q3 to CHF 890 million (~$1 billion). Coupled with falling advisory and underwriting revenues, this resulted in a 24% reduction in total revenues for the investment banking division. With expenses largely remaining unchanged, this led to a 68% fall in pre-tax income for the division.
… But The Americas Wealth Management Business Continues To Deliver
UBS’s revamped business model hinges substantially on its global wealth management business, which churned out strong results over the first two quarters of the year. It was also over this period that the bank took the crown of the world’s largest wealth manager from Bank of America (NYSE:BAC) (see UBS Dethrones Bank of America As World’s Largest Wealth Manager). However, the bank had cautioned in late July that the results for Q3 will be lower due to the slowdown in Europe and the interest rate uncertainty in the U.S.
The warning was not unfounded, and the wealth management business excluding operations in the Americas showed a 6% decline in revenues over the quarter. But UBS managed to counter the impact of this on the bottom-line by reducing operating expenses – reporting pre-tax earnings which were flat compared to the previous quarter.
The wealth management business in the Americas fared much better in comparison, almost matching the record performance it put up last quarter. Aided by improved valuations of securities, the size of assets under management grew from $892 billion to $919 billion.Notes: