[Updated 03/09/2021] UBS update
After a 98% rally since the March 23 lows of last year, at the current price near $16 per share, we believe UBS’ stock (NYSE: UBS) has some more room for growth. UBS, the world’s largest wealth manager, has seen its stock increase from $8 to $16 off the 2020 March bottom compared to the S&P 500 which increased almost 70%. The stock is leading the broader market by a huge margin and has gained 69% over the last twelve months. The bank has outperformed the consensus estimates in each of the last three quarters, mainly driven by strong results in the investment banking division due to higher market volatility. This has boosted investor confidence in UBS’ stock.
UBS delivered a robust performance for its fiscal fourth quarter, with the bank’s profits surging by nearly 137% y-o-y to $1.7 billion, while its operating income was around $8.1 billion. UBS’s Investment Bank division had a remarkable quarter that saw operating income grow 20% y-o-y led by higher client activity levels, particularly across equity derivatives, cash equities, and credit product lines. It was followed by positive growth in all the other segments. On a similar note, UBS’ full-year 2020 operating income grew 12% y-o-y to $32.4 billion. It was mainly driven by higher Investment bank revenues (sales & trading and investment banking businesses) followed by growth in wealth management and asset management units.
Although the bank’s growth in 2020 was mainly led by the investment bank division, which benefited from higher client activity levels due to market uncertainty, its other segments have shown positive growth, too. UBS has reported a 14% y-o-y growth in Global Wealth Management (GWM) invested assets and a 4% rise in the segment’s revenues – GWM contributes close to 55% of total revenues. Further, its asset management business has reported a 22% y-o-y jump in invested assets. This implies that even though the investment bank’s revenues are likely to normalize in the current year with expected recovery in the economy, other segments will likely make up for the weakness. Hence, the net impact on UBS’ revenues is expected to be marginal. Further, the bank has increased its provisions for credit losses from $78 million to $694 million in 2020, due to the higher risk of loan default. We expect the same to decrease in the current year, with improvement in economic conditions, boosting UBS’ profitability. Additionally, UBS’ P/E multiple changed from just above 9x in 2018 to close to 8x in 2020. While the company’s P/E is just below 9x now, this leaves some scope for upside when the current P/E is compared to levels seen in the past years – P/E multiple of around 11x at the end of 2019 and just above 9x in 2018. Our dashboard “What Factors Drove 27% Change In UBS Stock Between 2018-End And Now?” provides the key numbers behind our thinking.
[Updated 01/08/2021] UBS Stock Is Expensive At The Current Levels
After close to a 100% gain since the March 23 lows of the last year, at the current price of $16 per share, we believe UBS Stock (NYSE: UBS) has surpassed its near-term potential. UBS, the biggest Swiss banking group and the world’s largest wealth manager, has seen its stock rally from $8 to $16 off recent bottom compared to the S&P which moved around 70% – the stock is leading the broader markets and has gained 19% over the last 12 months. The stock growth could be attributed to better than expected results over the recent quarters, with UBS profits surging by nearly 100% y-o-y in the third quarter of 2020. This growth was mainly driven by growth in UBS sales & trading and investment banking businesses – its top-line has increased 9% to a consolidated figure of $31.3 billion for the last 4 quarters from the consolidated figure of $28.8 billion for the 4 quarters before that.
UBS’s stock has surpassed the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. This seems to make it expensive as, in reality, demand and revenue growth will likely be lower in the coming months, as compared to the recent quarters.
UBS’ revenues fell around 4% from $30.2 billion in 2018 to about $28.9 billion in 2019 due to negative growth in wealth management and personal & corporate banking segments. It translated into a 12% drop in the net income figure, reducing the net income margin from 16.2% in 2018 to 14.9% in 2019. Notably, the bank reported significantly lower net income in FY 2017, mainly due to the one-time impact of the U.S Tax Act.
While the company has seen a drop in EPS over 2018-2019, its P/E multiple has increased. We believe the stock is expensive at the current level and is unlikely to see significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 26% Change In UBS Stock Between 2018-End And Now?” has the underlying numbers.
UBS’s P/E multiple has changed from just above 9x in FY 2018 to around 11x in FY 2019. The company’s P/E has benefited from the earnings beat in the first three quarters of 2020 and is just above 13x now. This leaves some space for downside when the current P/E is compared to levels seen in the past years – P/E multiple of just below 11x at the end of 2019 and 9x at the end of 2018.
So Where Is The Stock Headed?
UBS’s cumulative nine months operating income has grown by 11% y-o-y, mainly on the back of its investment banking segment (sales & trading and investment banking) and asset management business. While the sales & trading business benefited due to higher market volatility in 2020 due to the Covid-19 crisis, leading to higher trading volumes, investment banking (capital markets sub-segment) benefited from a jump in underwriting deals. That said, as the economic conditions improve, we expect the investment bank revenues to normalize. Further, the positive growth in the Asset Management segment was primarily driven by a one-time gain from stake sale in Fondcenter AG to Clearstream. Additionally, UBS derives a significant chunk of its revenues from wealth management and personal & corporate banking segments – 57% and 13% respectively in 2019, which are likely to suffer due to the lower rate environment and build-up in provisions for credit losses. While we expect the negative GDP scenario to improve in the coming months, resulting in a favorable decrease in the provisions for credit losses, the lower rate environment is likely to persist for some time. This is likely to restrict growth in both segments. Overall, UBS is unlikely to maintain its revenue growth in the subsequent quarters, which is likely to act as a reality check for its investors.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
While UBS’ stock can move, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Dow Inc. vs. Altice USA shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.