Proposed Cost-Cutting Measures by UBS Present Substantial Upside

by Trefis Team
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UBS (NYSE:UBS) recently released a clearer picture of the organization-wide changes it proposed to undertake in a bid to significantly cut costs. [1] The Swiss bank had hinted at radical cost cutting measures when it announced results for the second quarter of 2011. [2]  The blueprint of its proposed changes released earlier marks a reduction in nearly 3,500 jobs and will save the bank about CHF 2 billion ($2.5 billion) in annual recurring expenses by the end of 2013. UBS competes with rivals such as Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM), Credit Suisse (NYSE:CS), and Goldman Sachs (NYSE: GS).

We have a near $20 price estimate for UBS, which is notably ahead of the current market price. We attribute the price difference to the market’s negative sentiments over the the growing European debt crisis compounded by uncertainty over the impact of the U.S. debt rating downgrade.

Impact on the bank’s operating segments

The proposed reduction in headcount has been distributed among the bank’s various businesses as follows:

  • Investment Bank : 45%, representing about 1,600 jobs
  • Wealth Management & Swiss Bank: 35%, representing about 1,200 jobs
  • Global Asset Management: 10%, representing nearly 350 jobs
  • Wealth Management Americas: 10%, representing nearly 350 jobs

According to the bank’s annual report, its investment banking division had nearly 17,000 full-time personnel at the end of 2010 with the division’s personnel expenses being about CHF 6.7 billion. The proposed reduction in 1,600 jobs should reduce personnel costs by about 10% – nearly CHF 700 million (~$900 million) each year. This signifies a boost in the division’s operating margin to almost 26% from current estimates of 18% at the end of 2 years.

Similarly, the impact on the Wealth Management & Swiss Bank operating division, which had close to 28,000 personnel at the end of 2010, will be an improvement in margins to nearly 40% by the end of 2 years.

Margins for the other 2 divisions are expected to rise by less than 2% over this period.

This adds substantial value to UBS

With margins improving across all divisions for UBS, the reduction in jobs is clearly a step in the right direction. Even after considering the impact of the one-time CHF 550 million (~$700 million) restructuring cost which UBS expects to take, the proposed cost cutting measure provides a near 15% upside to our $20.08 price estimate for the bank.

See our full analysis of UBS

  1. UBS update on cost reduction plans, UBS Press Releases, Aug 23 2011 []
  2. UBS second quarter earnings release, UBS Press Releases, Jul 26 2011 []
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