How Much Can UBS Gain If It Successfully Merges Its Wealth Management Units?

Earlier this year, UBS detailed its plans to merge its two wealth management divisions – the one encompassing its operations in the Americas (Wealth Management Americas) and the other one that housed all its other operations worldwide (Wealth Management) – in a bid to improve the profitability of its cornerstone business. With the Swiss banking giant slowly aligning these two divisions over recent years, the planned merger to form a new UBS Global Wealth Management division made sense, as it would allow the bank to cut costs while improving client services. Further, peer Credit Suisse has always managed its global wealth management operations as a single division.

One of the cost-cutting avenues that have emerged for the bank from the merger is its ability to negotiate better discounts from fund managers and other financial institutions whose products its wealth management arm brokers. This, coupled with other cost synergies realized from the merger, are likely to have a material impact on UBS’s value over the coming months – something we quantify in our interactive model for UBS. We estimate that if UBS can achieve cost synergies of 5% from the merger, then this would imply an upside of nearly 10% for its value over 2018.

Cost synergies of 5% imply that the combined operating costs for the bank’s two wealth management divisions would decline by 5% purely due to changes and opportunities created by the merger. We arrive at our conclusion in five simple steps:

• Forecasting EBT for UBS’s Wealth Management (WM) Division: UBS’s Wealth Management division (Switzerland and other international operations excluding Americas) has seen its revenues grow steadily over recent years, while lower one-time restructuring costs helped boost its profit margin. We forecast its revenues to increase to CHF 7.8 billion in 2018 from CHF 7.5 billion in 2017 (+2.5%), while margins should increase to 32% for the year from just over 30% in 2017 (+2% points). Using these figures, we arrive at our forecast for UBS’s Wealth Management EBT assuming UBS had not gone ahead with its merger plan.

• Forecasting EBT for UBS’s Wealth Management Americas (WMA) Division: UBS’s Wealth Management Americas division should benefit in 2018 from the ongoing increase in interest rates in the U.S., with expenses growing at a slower rate than revenues. Because of this, we forecast revenues to increase to CHF 8.6 billion in 2018 from CHF 8.35 billion in 2017 (+3%), while margins should increase to 16.5% for the year from 15% in 2017 (+1.5% points). Using these figures, we arrive at our forecast for UBS’s Wealth Management Americas EBT (assuming UBS had not gone ahead with its merger plan).

• Determining Total EBT for UBS: The total EBT combines the estimates for the WM and WMA division with that for UBS’s other operations. All Other Operations includes UBS’s investment banking division, asset management division as well as retail & commercial banking division. We expect profits from these operations to roughly double from CHF 1.86 billion in 2017 to CHF 3.4 billion in 2018 due to a combination of higher equity trading revenues, improving asset management margins and higher retail banking revenues from a stronger outlook for the European region. This works out to total EBT of CHF 7.3 billion in 2018.

• Quantifying the Impact of Merger Synergies: We assume that UBS’s efforts to merge its wealth management division will unlock cost synergies of as much as 5%. These synergies are primarily expected to come from a reduction in headcount for support and administrative functions across the wealth management operations. Additionally, UBS is also likely to leverage its larger asset base to negotiate better deals with fund managers and other financial institutions – materially helping profits. As merger synergies of 5% imply a 5% reduction in total operating costs for the WM and WMA division combined (with no impact on operating costs for other operating divisions), UBS’s EBT for the year after including synergies would be CHF 7.95 billion (up 8.6% from the base-case figure of CHF 7.32 billion) as shown below.

• Estimating UBS’s Valuation: Finally, we use the EBT estimate from above along with UBS’s current EV/EBT multiple and the forecast for CHF-USD exchange rate to arrive at our estimate for UBS’s share price in U.S. Dollars. We also assume that the bank’s outstanding shares remain at the same level at which they were in 2017.

As seen in the chart above, the ~9% higher EBT translates into an increase in UBS’s share price by the same amount, with our price estimate for the Swiss bank increasing from $18 to over $19.50.

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