UBS May End Up With Lower Revenues From Its Decision To Hike Wealth Management Fees

by Trefis Team
+2.15%
Upside
18.11
Market
18.50
Trefis
UBS
UBS
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UBS (NYSE:UBS) is reportedly working on a new fee structure which will require its wealth management clients in the U.S. to pay more for the Swiss banking giant’s services. UBS’s decision makes sense given the fact that it had made no changes to its fee structure since 2009, and also because its wealth management revenues have largely stagnated over recent quarters. The bank is looking to implement the changes from 2018 in order to give its employees sufficient time to communicate the higher fees to their clients.

But we believe the move may result in the world’s largest wealth manager losing some of its clients to competitors – something that does not bode well for the near-term performance of the bank, which has already been struggling to keep up with peers such as Credit Suisse in terms of inflows. This could, in turn, lead to lower revenues for UBS’s cornerstone wealth management operations going forward. This represents a downside risk to our $18.50 price estimate for UBS’s stock, which is about 10% ahead of the current market price.

See our complete analysis of UBS here

UBS has implemented drastic changes to its business model since 2012 in a bid to achieve sustainable profits in the stricter regulatory environment seen worldwide. Notably, UBS was the first global banking giant to announce plans to substantially shrink its fixed-income trading business – slashing no less than 10,000 jobs in the process. With a long-term strategy of focusing on its global wealth management operations in the future, UBS worked through a bulk of its balance sheet over 2013-2014. While UBS’s overall reorganization plan is nearly complete, the bank has had to contend with a subpar performance by its cornerstone wealth management division over recent quarters.

The importance of UBS’s global wealth management operations as a part of its revamped business model is demonstrated by the chart above, which shows that the business contributes around 45% of the Swiss bank’s total value. UBS manages its wealth management operations as two separate units based on geographical divisions: one that focuses purely on the Americas region (primarily the U.S.), and one that includes its other global operations (including its core unit in Switzerland).

Notably, Wealth Management Americas has over $1.2 trillion in invested assets compared to a figure of CHF 1.1 trillion ($1.11 trillion) for the Wealth Management division. Despite this, the former contributes to just about 16% of UBS’s share value, while the latter is responsible for nearly 30% of the total value. This discrepancy can be explained by the fact that Wealth Management Americas has operating expenses that are ~35% higher than those of Wealth Management, although revenues are only about 9% higher. In fact, the Americas unit has struggled to remain profitable over the years – with its profit margins remaining negative or extremely low since the economic downturn.

While these poor profit margins likely prompted UBS’s decision to hike fees, the move comes with a notable problem – clients may choose to switch to competitors. This could lead to sizable outflows for the bank over the coming months and should exacerbate the bank’s existing problem of poor fund flows. After all, Wealth Management America’s reported net outflows for three of the last four quarters, and is expected to report a net outflow for full-year 2017. The primary reason for this is that the bank has lost many of its advisors (and the corresponding client assets) to rivals in the last twelve months. Accordingly, the bank is expected to continue to incur elevated compensation fees to prevent further attrition going forward even as the top line remains under pressure.

You can understand how a reduction in UBS’s Wealth Management Americas’ invested assets impacts our price estimate for the bank by modifying the chart below.

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