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Investment Overview for UBS (NYSE:UBS)
Below are key drivers of UBS's value that present opportunities for upside or downside to the current Trefis price estimate for UBS:
- Assets under Management - International Clients: UBS's cornerstone wealth management business aims to grow over coming years by focusing on developing nations. The international business wealth management unit has reported a steady increase in the size of assets under management since the downturn to reach $885 billion by the end of 2014. Although negative foreign exchange movements and a sharp decline in securities valuation over the second half of 2015 led this figure lower to $803 billion in 2015, we expect these assets to grow at roughly 3% annually over our forecast period. If these assets grow at an annual rate of 6% over this period, then this would result in a 5% upside to the Trefis forecast price.
- Wealth Management EBT Margin: UBS's wealth management unit reported operating margins in excess of 45% over 2005-07, before the economic downturn of 2008 and the resulting slowdown resulting in margins falling to below 10% in 2012. While the figure has improved to 27% in 2015, we expect profits to improve to 35% by the end of our forecast period thanks to UBS's ongoing efforts to streamline operations. However, if margins remain around current levels over the future, then this represents a downside of nearly 7% to the Trefis price estimate.
- Investment Banking EBT Margin: Margins for UBS's investment banking operations have improved considerably since the downturn, however the division continues to see large one-time costs erode profits. While the EBT margin for 2015 was just 14%, we expect it to improve to 30% by the end of the Trefis forecast period. However, if increased competition in the bond-trading industry coupled with stricter capital requirements weigh on profits, then margins could only improve to 25% by the end of this period. This represents a 10% downside to the current price estimate.
UBS is the largest Swiss banking group, offering a strong combination of wealth management, asset management and investment banking services on a global and regional basis. It delivers a full range of advisory and financial product related services to its private, corporate and institutional clients.
Wealth Management is the company's most valuable division
The total assets under management(AUM) for the Wealth Management division (Swiss Clients, Americas Clients and International Clients) is currently well over 3 times that of the Asset Management division. The Equity Underwriting & Debt Origination division has seen pressure on fees over recent years for both the Equity Underwriting and Debt Origination sub-divisions, and the bank's decision to shrink its bond trading business considerably has reduced the once money-minting unit to a fraction of its former size. These factors make Wealth Management more valuable for UBS.
Under Wealth Management, International Clients are more valuable than Swiss Clients
The AUM for International Clients are currently nearly five times that for Swiss Clients. This coupled with the bank's focus on growing its international business makes international clients more valuable to its wealth management business.
Trading equities is much more valuable for UBS than trading bonds, currencies and commodities
UBS was the first global banking giant to announce plans to slash its presence in the bond-trading industry significantly to align its business model better with stricter capital requirement norms. As a result, the bank's trading assets for bonds, currencies and commodities are roughly two-thirds its equity trading assets. Moreover, yields from equity trading are notably better than those from bond trading. This makes the equity trading division more valuable for UBS than bonds, currencies and commodities trading.
Increasing demand for investment banking services in emerging markets
With GDP and per capita income of emerging markets growing rapidly, there is an increasing demand for capital from companies in these markets to support the growing purchasing power of the people. Also with the integration of these markets with the global economy, there is a shifting trend in these countries from family-run businesses to corporations. As a result of these factors, an increasing number of companies in these markets are going public, leading to a growing demand for equity underwriting services. Additionally consolidation across different sectors is driving demand for M&A advisory services.
Stringent Swiss capital requirement norms will negatively impact the bank's return on equity figures
Swiss regulatory requirements are the strictest in the world when it comes to core capital ratios and leverage ratios for the country's two biggest banks: UBS and Credit Suisse. Both these banks have put in considerable effort over the years to revamp their business model to comply with the strict norms, but they have also had to raise a substantial amount of fresh capital. With earnings likely to grow at a modest pace over coming years, the higher capital base are likely to result in lower return on equity (ROE) figures for the Swiss banks compared to their other global banking peers.
Volcker Rule to affect proprietary trading
The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. UBS's proprietary trading desks have accounted for a significant percentage of its earnings in the past. The Volcker Rule is likely to result in a reduction in total trading revenues from the U.S. for the bank.
Economic Recovery to Stimulate Wealth Management
As economic conditions eventually improve, we expect that investors' risk appetites will also increase, which should drive investment and demand for wealth management services. Long term trends, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies, will also positively impact revenues and assets under management.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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