VALUATION HIGHLIGHTS

1. Wealth Management constitutes 51% of the Trefis price estimate for UBS's stock.
2. Personal & Corporate Banking constitutes 18% of the Trefis price estimate for UBS's stock.
3. Equity Trading constitutes 10% of the Trefis price estimate for UBS's stock.

Latest Earnings Q4'20

UBS delivered a robust performance for its fiscal third quarter, with the bank's profits surging by nearly 137% y-o-y to $1.7 billion while its revenues were around $8.1 billion. UBS's Investment Bank division had a remarkable quarter which saw revenues grow 21% y-o-y led by higher client activity levels, particularly across equity derivatives, cash equities and credit product lines. Moreover, UBS's provisions for credit losses fell to $66 million from $89 million in the previous quarter.

Impact of Covid-19

UBS' bank has suffered since the outbreak of coronavirus. The global spread of the virus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Further, this impact was exacerbated by falling interest rates which negatively impacted the bank's net interest income.

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 $919 billion by the end of 2017. Although negative foreign exchange movements and a decline in securities valuation over 2018 led this figure lower to $857 billion in 2018, this figure recovered to cross $1 trillion in 2019. We expect these assets to grow at roughly 3.5% annually over our forecast period. If these assets grow at an annual rate of 7% 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 30% over 2005-07, before the economic downturn of 2008 and the resulting slowdown resulting in margins falling to below 17% in 2010. While the figure improved to 21% in 2019, we expect profits to improve to 22% by the end of our forecast period thanks to UBS's ongoing efforts to streamline operations. However, if margins improve to reach 25% over the future, then this represents an upside of ~10% to the Trefis price estimate.

Investment Banking

• Investment Banking EBT Margin: Margins for UBS's investment banking operations have improved considerably since the downturn. However, the division turned profitable in 2012 only, as earlier substantial one-time costs eroded profits. While the EBT margin for 2019 was 11%, we expect it to improve to 14% by the end of the Trefis forecast period. However, if increased competition in the bond-trading industry and stricter capital requirements weigh on profits, then margins could fall below 10% by the end of this period. This represents a 7% downside 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, 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 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 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 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 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 the coming years, the higher capital base is 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. However, the outbreak of coronavirus has adversely impacted economic recovery. The current impact of COVID-19 cannot be ascertained, but it will take at least a couple of quarters before the economic conditions improve.