Is UBS Leaving Money On The Table By Not Focusing Enough On Investment Banking Operations?

by Trefis Team
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UBS (NYSE:UBS) and Credit Suisse (NYSE:CS) are the two largest Swiss banks. After the economic downturn, the banks decided to cut back their investment banking activity and increased their focus on the wealth management business in view of stricter regulatory requirements. While the banks share similar business models and derive revenues from similar streams, UBS appears to have made its investment banking operations too small to compete effectively with its U.S. peers. We believe that there is sizable room for growth in the bank’s investment banking operations – especially in its advisory and underwriting businesses. Keeping in mind the fact that UBS has consolidated its balance sheet well over the years by focusing on wealth management, now may be a good time for it to complement the business model by expanding its presence in key investment banking areas.

Trefis compares key revenue metrics for UBS vs Credit Suisse in an interactive dashboard, and concludes that UBS’s business model has more stable revenue streams, while Credit Suisse’s business has the potential to generate very high margins and profitability due to its larger IB division. The dashboard captures historical performance trends for UBS and Credit Suisse over recent years along with our forecast for 2019. Additionally, you can find more Trefis Financial Services company data here

UBS has a less diversified business model compared to Credit Suisse, but it is the bigger bank

  • UBS reported $31 billion revenues in 2018 with Wealth Management division contributing more than 55% of total revenues.
  • Credit Suisse’s revenue in 2018 stood at $21.5 billion with Investment Bank and Wealth Management both contributing approximately 40% to total revenues.
  • Since 2015, UBS’s revenue has declined at an average annual rate of 1.7% primarily due to sub-par performance of its investment bank while its Wealth Management business has flourished.
  • On the flip-side, Credit Suisse has lost $3.8 billion to total revenue at an average annual rate of 5.4% mainly due to the bank’s decision to scale down its securities trading business

INVESTMENT BANKING REVENUE STREAMS:

#1.1 Credit Suisse Generates More Advisory Services Revenues Due To A Larger Market Share, But UBS Makes More Money Per Deal

  • As of 2018, Credit Suisse’s advisory services revenues stood at $950 million – roughly 30% more than that of UBS’s $717 million.
  • Although, UBS’s average fee figure of 0.3% was more than Credit Suisse’s 0.2%, CS’s market share in the complete M&A deals was much higher- helping Credit Suisse generate a larger chunk of revenues.

#1.2 Credit Suisse’s Equity Underwriting Division Is Bigger And More Profitable

  • Credit Suisse’ s Equity Underwriting Revenues of $1.3 billion in 2018 were roughly 60% more than UBS’s $0.8 billion.
  • Although, Credit Suisse and UBS had similar market share of 4%, Credit Suisse realized a much higher fee per deal from its clients of 4.6% while UBS’s average fee figure was 2.8%
  • This is primarily because UBS usually takes up secondary roles in equity underwriting deals. The notable gap with Credit Suisse also implies that there is significant room for growth.

#1.3 Credit Suisse’s Debt Underwriting Revenues Are Double UBS’s

  • Credit Suisse’s Debt Underwriting revenues of $1.7 billion were more than 2x that of UBS’s 0.8 billion.
  • This difference was mainly due to a combination of higher fees and larger market share

#1.4 Credit Suisse’s FICC Trading Revenues Are 1.5x That For UBS

  • Credit Suisse’s FICC trading revenues of $2.4 billion was 1.5x to UBS.
  • Notably, though, UBS was generating a higher yield from its operations.
  • As of 2018, UBS’s average yield stood at 4.8% while Credit Suisse’s average yield was 3.1%.
  • While this signifies that UBS has chosen to focus on key FICC trading areas where it can generate higher returns, there is definitely room for growth in this area over coming years.

#1.5 However, UBS’s Equity Trading Revenues Are Almost Double Credit Suisse’s

  • On the contrary, UBS has a much larger Equity trading desk. UBS’s equity trading revenues of $3.9 billion were 50% more than Credit Suisse’s $2.6 billion.
  • UBS’s generates higher trading yields and also employs more trading assets in its equity operations.

 

Additional details about how UBS’s wealth management and asset management revenues compare with Credit Suisse are available in our interactive dashboard.

 

CONCLUSION

  • In addition to the above revenue streams, UBS also derives roughly 15% of its revenues from its retail banking division while Credit Suisse generates minimal revenues from its retail operations.
  • UBS has a much larger Wealth Management Business while Credit Suisse has a larger IB business.
  • While UBS’s business model has more stable revenue streams, Credit Suisse’s business has the potential to generate very high margins and profitability due to its larger IB division
  • With a strong balance sheet and a proven wealth management business, UBS can afford to bet more on growing its investment banking business.
  • However, as of now, UBS’s business is larger and more profitable than its Swiss rival.

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