Since the acquisition of Credit Suisse, UBS's share price has reached nearly 30%, and it is betting that the valuation of new shareholder Cevian Capital is expected to double in the next three to five years, so can UBS really succeed in catching up with its fierce rival Morgan Stanley?
UBS's recent performance, including slightly better-than-expected financial data (such as asset growth from the acquisition of Credit Suisse), CEVIAN Capital's stake, strengthened shareholder dividends and share buybacks, and setting a high target return on equity have given investors confidence.
After an initial period of skepticism, investors began to recognize the long-term value and potential benefits of the merger. However, UBS's integration and M&A still faces many potential difficulties, and investors still have doubts about UBS's future growth.
Analysts believe UBS could be the next Morgan Stanley, but only if Credit Suisse's M&A integration is smoothly pursued while maintaining strong growth in the wealth management business and achieving its goal of an 18% return on equity and $5 trillion in wealth management assets by 2028.
In order to strengthen its leadership position in the global wealth management market, especially in the United States, UBS acquired the "troubled" Credit Suisse in 2023.
On the bright side, UBS has had an initial win since the merger. Since the merger and acquisition in June 2023, UBS** has achieved a total return of 34%, far exceeding the 6% return of the Stoxx Europe 600 index over the same period, and UBS's Q4 financial report data shows that UBS's asset size in 2023 has increased by 56% compared to 2022. The CEO of UBS said that since the merger, the net new assets entrusted by customers have reached $77 billion, and the merger has significantly increased the asset scale of UBS. After an initial period of skepticism, investors began to recognize the long-term value and potential benefits of the merger.
On the downside, UBS's path to Credit Suisse still faces a number of potential difficulties. UBS's revenue increased by only 18% relative to a 56% increase in assets in the world. And UBS reported a net loss attributable to shareholders of 2.2 percent in the fourth quarter, taking into account the significant costs of the Credit Suisse acquisition$7.9 billion, continuing the downward trend in the second three quarters. UBS executives have warned that this year will be the most difficult phase of the integration process between the two banks. Moreover, UBS's annual accounts show that when calculating the cost of the acquisition, UBS received up to $29 billion in financial benefits from completing the acquisition at a discount to Credit Suisse's actual value, which is recorded on the books by UBS in one go and will not be reflected in future financial reports.
It is worth noting that two-thirds of the integration costs of the M&A remain unpaid, and these costs will come in the form of huge quarterly charges between now and 2026, and UBS will face continued financial pressure in the coming years, exacerbating market doubts about the outcome of the UBS M&A.
Although this strategic merger and acquisition has accelerated the pace of UBS wealth management, it has also brought a series of potential difficulties to UBS, such as the huge costs and expenses brought by Credit Suisse, liquidation, legal liabilities and other complex M&A details. UBS's expansion strategy is accompanied by a reduction in businesses that are underperforming or not aligned with a long-term strategy to ensure that resources are allocated and utilized effectively.
In the process of merging Credit Suisse, UBS closed two-thirds of Credit Suisse's investment banking business and almost all of its trading business, while cutting about 3,000 jobs at Credit Suisse.
UBS CEO Sergio Ermotti said it would focus on restructuring and optimizing the combined business.
Morgan Stanley's previous successful M&A cases have set a precedent for the market. Previously, Morgan Stanley set a 20% return on tangible equity (ROTE) target that was favored by the market. At the same time, Gorman helped Morgan Stanley expand its business scope and market share in wealth management and brokerage services through a series of acquisitions, including the acquisition of asset management company Eaton Vance and broker e*trade.
Under the leadership of former CEO James Gorman, Morgan Stanley successfully transformed from a "troubled" investment bank to a wealth management giant by setting ambitious financial targets, executing strategic transformations and making key acquisitions.
At a time when the market is hesitant, analysts believe UBS needs a long-term growth story that inspires investor confidence and interest. Luckily, UBS has such a story.
In December, Cevian Capital, one of Europe's largest aggressive investment firms, invested $1.3 billion in UBS. According to public information, CEVIAN Capital typically invests in companies that they believe are undervalued, or that can add value through management changes, and will actively help companies make strategic changes to enhance company value. Cevian Capital is betting that UBS has such long-term growth potential.
In addition, Cevian Capital may have taken a fancy to UBS's valuation, which at the time was only half that of Morgan Stanley, and had potential room for growth relative to its undervalued US peers.
CEVIAN Capital's stake not only provides financial backing, but may also put pressure on management to take steps to boost UBS's valuation.
In the aftermath of the 2008 financial crisis, the market re-evaluated the business model, and "providing services to the super-rich" became a business that financial institutions competed to pursue. Compared to investment banking, wealth management services for the super-rich are more capital efficient, generating higher returns with less capital investment, while often locking in clients for years. Through long-term customer relationships, it can bring stable revenue and profits to the bank.
UBS already has this popular portfolio, with 52% of UBS's revenue coming from wealth management in 2023, compared to 49% for Morgan Stanley. UBS's return on tangible equity in wealth management is just 16%, compared to Morgan Stanley's 33%. This difference suggests that while UBS has a higher percentage of revenue in the wealth management space, Morgan Stanley is more profitable in the same area.
Some analysts pointed out that UBS's lower return on tangible equity was partly due to the integration of Credit Suisse. In addition, UBS's one-time loss on its stake in financial services company Six Group also had an impact on its earnings. Without these one-off factors, UBS's return on tangible equity of 25% in 2022 is closer to Morgan Stanley than in 2023.
UBS CEO Ermotti said:
"UBS's wealth management business will attract its goal of $100 billion in net new money this year and again in 2025. ”Analysts point out that in order to achieve this goal, UBS may need to compete fiercely with Morgan Stanley in the United States. The U.S. market is Morgan Stanley's home turf, and competition is particularly fierce here. Since wealth advisors play a more important role in the United States, wealth management costs are higher in the United States. If UBS wants to grow in the U.S. market, it may need to compete for market share with local competitors in a high-cost environment.
In addition, in order to boost market confidence and raise UBS's valuation, UBS has taken a number of measures:
1) Set long-term return on equity and wealth management asset targets
Compared to UBS, Morgan Stanley's high valuation is not only due to the bank's ability to generate high profits from its existing wealthy client business, but also to the market's expectations of Morgan Stanley's high-growth targets. In fact, Morgan Stanley's growth targets are even more ambitious, with the bank's client asset target for its wealth and asset management division increasing from $6 by the end of 2023$6 trillion to $10 trillion. Analysts expect the bank to approach that target by the end of 2027, according to Visible Alpha. In order to meet the high expectations of the market, Morgan Stanley needs to continue to grow the scale and market share of its wealth management business in the future.
At the same time, the market expects UBS's client assets to grow modestly. In order to inflate valuations and change the market's low growth expectations, UBS decided to demonstrate its commitment to future business growth by setting specific long-term targets. To that end, UBS executives on Tuesday reaffirmed their goal of achieving a return on equity of 15% in 2026 and set a new target of 18% return on equity in 2028. In addition, UBS pledged that by 2028, the bank's wealth management assets will increase from the current 39 trillion to $5 trillion.
UBS CEO Sergio Ermotti told analysts on Tuesday:
"We're not just a restructuring story, we're going to grow again. ”2) UBS intends to increase ** dividend and resume share repurchase program. Analysts believe that while this may improve investor returns and attract shareholders in the short term, it may also sacrifice UBS's investment funds in other key areas to the detriment of its ability to invest in the business.
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