VALUATION HIGHLIGHTS

1. Wealth Management constitutes 52% of the Trefis price estimate for UBS's stock.
2. Personal & Corporate Banking constitutes 22% of the Trefis price estimate for UBS's stock.
3. Asset Management constitutes 9% of the Trefis price estimate for UBS's stock.

WHAT HAS CHANGED?

Latest Earnings Q4'23

UBS reported total revenues of $10.9 billion, which was 35% more than the year-ago figure. However, it was more than offset by a significant jump in operating expenses, leading to an operating loss of $751 million for the period vs. a profit of $1.9 billion a year ago. Further, the full year FY2023 revenues were $40.8 billion.

Credit Suisse Acquisition

UBS agreed to acquire Credit Suisse on 19th March 2023 for $3.2 billion. Under the terms of the all-stock deal, Credit Suisse shareholders received 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share. Notably, the acquisition was pushed by Swiss regulators to bail out Credit Suisse from its difficult liquidity position.The combination of both banks created a business with more than $5 trillion in total invested assets across the group. Further, it strengthened UBS's position as a leading wealth manager with $3.4 trillion in invested assets.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of UBS's value that present opportunities for upside or downside to the current Trefis price estimate for UBS:

Wealth Management

• Assets under Management - International Clients: UBS's cornerstone wealth management business aims to grow over the 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 $2.8 trillion by the end of 2022.
• Wealth Management EBT Margin: UBS's wealth management unit reported operating margins of 26% in 2022. We expect EBT % to remain around the current levels. However, if margins decrease to 24% over the Trefis forecast period, this represents a downside of ~3% to the Trefis price estimate.

Investment Banking

• Investment Banking EBT Margin: Margins for UBS's investment banking operations were 28% in 2021, which decreased to 22% in 2022. We expect it to decrease slightly over the Trefis forecast period. However, if margins increase above 25% by the end of this period, this represents a 3% upside to the current price estimate.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

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) are currently three 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. 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 is currently more than four 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 significantly slash its presence in the bond-trading industry 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 one-third of its equity trading assets. This makes the equity trading division more valuable for UBS than bonds, currencies, and commodities trading.

KEY TRENDS

Increasing demand for investment banking services in emerging markets

With the 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 regarding 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 the coming years, the higher capital base will likely result in lower return on equity (ROE) figures for 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 will also positively impact revenues and assets under management, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies.