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