Why UBS’s Wealth Management Operations Remain Key To Its Prosperity

by Trefis Team
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UBS’s (NYSE: UBS) success over the years has been driven primarily by the bank’s wealth management business. After the economic downturn, the Swiss banking giant decided to cut back its investment banking activity and increased its focus on the wealth management business in view of stricter regulatory requirements. As a result, the contribution of wealth management to the bank’s revenue has steadily increased since then. Trefis highlights the importance of Wealth Management for UBS in an interactive dashboard. We find that wealth management is the most important segment for the bank – accounting for more than half of the bank’s revenues. While the Swiss banking giant’s other segments have struggled, wealth management has achieved steady growth to consolidate its pole position in UBS’s business model. You can modify any of our key drivers to gauge the impact changes would have on UBS’s valuation.

#1 Wealth Management Makes Up More Than Half Of UBS’s Revenues

  • Wealth management is the single-largest segment for UBS in terms of revenues and accounts for nearly 56% of the bank’s total revenues.
  • After declining in 2016, the division’s revenues have achieved robust growth and stood at $16.9 billion in 2018.
  • Asia-Pacific region has been the largest growth driver – accounting for a bulk of the growth in the wealth management business.
  • Moreover, faster growth of the wealth for Asian citizens as compared to their European counterparts has helped UBS achieve steady growth in this region.
  • Global headwinds are expected to have weighed on the segment’s revenues for 2019, though, with revenues declining sequentially to $16.1 billion.

#2 Growth In Wealth Management Revenues Has Outpaced The Consolidated Bank In Each Of The Last 3 Years

  • UBS’s total revenue has seen sizable headwinds since 2015, and has shrunk from $31.8 billion to around $30.2 billion in 2018.
  • On the other hand, the wealth management business has done much better, with the division witnessing a growth of 5% over the same time frame.
  • The division’s revenues have gone up from $16.1 billion in 2015 to nearly $17 billion in 2018.
  • However, the division’s year-to-date 2019 results have been soft mainly due to client preferences for mandates (allocation of funds) with lower fees which have adversely impacted the division’s revenues.
  • Although the uncertain environment as well as low consumer sentiment are likely to weigh on the division’s revenue growth in the near future, wealth management is expected to drive the bank’s growth in the coming years.

#3 Wealth Management Contributes Nearly Two-Third Of The Bank’s Pre-Tax Profits Thanks To Its Higher Margin

  • Wealth management is the bank’s largest division accounting for a majority of the bank’s profits.
  • The division reported a pre-tax profit of $4 billion in 2018, which was nearly 63% of the bank’s total pre-tax profit for the year.
  • Moreover, the division’s pre-tax margin of 23.6% was nearly 2.5 percentage points higher than the bank’s consolidated figure of 21.1%.

#4 Wealth Management Manages Nearly 75% Of The Bank’s Total Client Assets

  • As of 2018, UBS’s total client assets stood at $3 trillion with wealth management accounting for nearly 74% of the bank’s total client assets.
  • UBS manages the largest amount of private wealth in the world and has a large number of the world’s billionaires as its clients.
  • An increase in the number of high net-worth individuals (HNIs) as well as an increase in their assets helped the division’s client assets increase from around $2 trillion in 2015 to over $2.2 trillion in 2018.
  • Moreover, upbeat market conditions coupled with new money inflows have also aided the growth in the division’s client assets.

 

To sum things up, wealth management is the cornerstone of UBS’s business model and the bank’s future growth hinges to a large extent on this division. The division not only accounts for a bulk of the bank’s revenues, but also a majority of its profits. Moreover, with the bank cutting down its investment banking operations, the wealth management operations only become more important for UBS .

Based on our forecasts, UBS’s adjusted earnings per share for full-year 2019 is likely to be around $1.26. Using this figure with our estimated forward P/E ratio of 12.6x, this works out to a price estimate of $16 for UBS’s stock which is roughly 20% ahead of the current market price.

 

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