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UBS AT A GLANCE

P/E ► -4.93   EV/EBITDA ► 23.3 AVG ROA ► 0.7% AVG ROE ► -32% LOW Debt to Equity ► 36.1 HIGH Current Ratio ► 0   Interest Coverage Ratio ► 1.32 AVG

 

 

 

 

 

 

UBS AG (NYSE:UBS) is a leading global financial services firm and the second largest wealth manager in the world behind Bank of America (BAC) in terms of assets under management with $1,393 billion.^[1] It offers wealthy individuals investment management and financial planning services, as well as advises large corporations on mergers and acquisitions and helps them to raise capital through debt and equity offerings.

UBS has written-off more than $65b since the mortgage-backed securities market collapsed in 2007.^[2][3] Before the crisis, more than 90% of UBS' profit was generated from wealth management and investment banking. Today, both divisions still require 90% of their resources, but investment banking contributed 2/3 of its profit losses and wealth management contributed only 25% of profits. The economic crisis has prompted UBS to restructure its wealth management divisions to focus on increasing its presence in emerging markets and exit its riskiest ventures in investment banking.

Swiss banking and privacy laws create a tax haven for many tax evaders, but these same privacy laws are a competitive advantage for UBS against its foreign competitors. UBS is currently under investigation regarding its role in tax evasion and money laundering. As a result, it has had to pay out millions in settlement fees, close doors to many of its affluent foreign customers, as well as disclose its clients' names, which has damaged its privacy reputation. Despite this, UBS has established offices throughout Asia and other high-growth regions to capture the business of the rapidly increasing number of wealthy people, positioning itself to benefit from these regions’ explosive growth.^[4]

Business Overview

UBS operates in four divisions:

• Wealth Management & Swiss Bank serves wealthy individuals with private banking and asset management services. The Swiss Bank serves Swiss individuals and corporations, offering a range of retail banking and securities products and services.
• Wealth Management Americas serves high net worth individuals and families through its U.S., Canadian, and Brazilian offices.
• Global Asset Management manages investments for individual, institutional, and corporate clients across the world. The types of investments covered by this division include equities, fixed income, alternative assets, like hedge funds, and real estate investments.
• Investment Banking provides securities research, debt and equity underwriting, and mergers and acquisitions (M&A) advisory services, to corporate, institutional, and alternative asset management clients.
• Corporate Center ensures that the other four business divisions operate effectively.

Pre-tax profits through 2Q2009 ^[8]

Trends and Forces

Refocus on core businesses

Since 2000, UBS' business plan has focused primarily on investment banking and wealth management. Investment banking contributed 40% of profits and wealth management contributed more than 50% of profits.^[9] This profit contribution was more than 8x more than the standard investment division's profits. UBS' aggressive investments has backfired since the asset backed securities market crashed and the 2007 Credit Crunch. It is believed that they invested up to $100 billion into those securities.^[9] In 2008, UBS restructured its divisions in the hopes of focusing on its most profitable businesses and reducing its presence in risky areas.^[10] It separated its wealth management divisions to focus on driving growth for its Swiss Bank and increasing its presence in emergins markets, such as Brazil and China. These divisions contributed 26% of pre-tax profit. UBS has gained a strong investment banking reputation through acquisitions of boutique investment banks, but its strategy might have been too aggressive so it has been actively been trying to reduce its risk positions. Business activities for the investment banking division have been abnormally low due to the global recession, and in the first half of 2009, investment banking accounted for 64% of UBS' pre-tax profit losses.

U.S. tax evasion lawsuits and pressure on Swiss bank secrecy laws

Pressure from the United States and the European Union to crack down on tax evasion and money laundering could damage Switzerland’s famous reputation for banking privacy. As a Swiss bank, UBS offers clients from around the world the privacy and discretion for which the country is renowned. For UBS, this represents a threat to the competitive edge that the allure of these privacy laws gives it over non-Swiss competitors. UBS has taken measures to maintain its reputation for confidentiality, establishing operations in Singapore following the passage of laws there providing account holders with greater privacy.^[11] In July 2009, UBS and the United States IRS agreed to settle a would-be long running tax evasion lawsuit.^[12] UBS is expected to disclose between 3,000 to 10,000 American account-holders suspected of using offshore accounts to avoid taxes.^[13] In total, the US believes that close to $18b is being hidden in UBS by wealthy US clients.^[14] This settlement could be bittersweet for UBS. It is avoiding a long and costly lawsuit for the US Government, but will most likely face a lawsuit with the Swiss government for breaching Swiss banking privacy laws for disclosing account holders' names. This lawsuit comes on the heels of the $780 million February 2009 settlement with the US Government in a similar dispute^[13]

Emerging economies provide strong growth

With a well-established presence in the highly developed European and North American markets, UBS has made moves to expand into higher-growth regions such as Asia, the Middle East, and Brazil. Many of these economies have been growing very rapidly, leading to an increased number of wealthy people who need financial advisory and wealth management services. UBS has recognized this growing demand and established offices in these regions to capture the business of the rising number of affluent individuals. On July 9, 2008, UBS announced that it had received a permit to establish operations in Saudi Arabia, giving it access to the billions of "petrodollars" flowing into the country each year.^[15] In this way, UBS hopes to expand its existing customer base and position itself for strong growth in the future.

Low interest rates benefit UBS

U.S. interest rate trends over time

Interest rates can be thought of as the cost of borrowing money. As interest rates increase, businesses are less likely to issue debt or equity given that the price of borrowing has increased. UBS benefited from low interest rates because of its high level of mergers and acquisitions, underwriting, and IPO activity since 2004. However, the 2007 Credit Crunch and recent economic downturn has significantly hindered those activities. In response to worsening conditions in global credit markets, central banks across the globe have been slashing interest rates to entice banks to lend money and to stimulate those business activities that UBS benefited from. The U.S. Federal Reserve cut its target federal funds rate from 2% in July 2008 to 0.25% in July 2009, and the Bank of England cut its rates from 5% in July 2008 to 0.5% in July 2009.^[16][17]

Competition

Global M&A market share for the first nine months of 2007^[18]

As a leading wealth and asset manager, UBS competes with other firms that offer wealth management services, such as Credit Suisse Group (CS), HSBC Holdings (HBC), Citigroup (C), Deutsche Bank AG (DB), and others. Additionally, UBS shares the wealth management market with numerous local and regional firms that don't compete globally. Overall, UBS enjoys the top position in the wealth management market, with $2.13 trillion in client assets under management as of September 30, 2007.^[19]

As an investment bank, UBS competes with other leading firms in the industry, including Goldman Sachs Group (GS), Merrill Lynch (MER), Morgan Stanley (MS), and Deutsche Bank AG (DB), and Citigroup (C). Investment banking is a relatively new area for UBS, which started out as an asset manager. Nonetheless, the firm has risen to prominence in the industry, holding a 19% market share of the mergers and acquisitions (M&A) advisory market in the first nine months of 2007.^[20]

Of UBS's competitors, Credit Suisse Group (CS) is the most comparable. As a fellow Swiss firm, Credit Suisse enjoys the same benefits that Swiss banking privacy laws afford UBS and is also a leading wealth manager across the globe. Credit Suisse participates in the investment banking industry as well, coming just two slots behind UBS's number-five spot in terms of the value of its M&A in the first nine months of 2007. UBS is the larger of the two in terms of both market capitalization and total client assets, but Credit Suisse reported a 3Q2007 profit of $1.1bn^[21], compared to UBS's posted loss of $710m.^[22]

References

1. ↑ Bank of America Topples UBS as World Wealth Manager, CNBC July 6, 2009
2. ↑ Business Week, "Subprimes force UBS to write down $10b"
3. ↑ Bloomberg, "UBS Has SF20.9 Billion Loss, ‘Cautious’ on Outlook," Elena Logutenkova, 03/11/2009
4. ↑ Janus opens Singapore office to tap Southeast Asia | Funds | News | Reuters
5. ↑ ^{5.0 5.1} UBS Annual Report 2006 "Selected Financial Data"
6. ↑ ^{6.0 6.1} UBS Annual Report 2008 "Selected Financial Data"
7. ↑ UBS Quarterly Report 3Q2009 "Consolidated Statement of Income"
8. ↑ UBS 2Q2009 Financial Report
9. ↑ ^{9.0 9.1} The Globe and Mail, "Too big to fail, a Swiss icon swings back to life," Eric Reguly, 08/21/2009
10. ↑ Reuters, "Key details of UBS restructuring plans," 08/12/2008
11. ↑ Global Economy - Speaking Freely: A Tale of Two Cities – Asia Times Online
12. ↑ Reuters, "UBS, U.S. settle tax evasion case," Jonathan Stempel, 08/12/2009
13. ↑ ^{13.0 13.1} Forbes, "UBS/TAX (UPDATE 4):UBS, U.S. settle tax evasion case," Pascal Fletcher and Jim Loney, 08/12/2009
14. ↑ Times Online, "US claims UBS 'colluded' behind secrecy laws," Miles Costello and Agencies, 07/17/2009
15. ↑ UBS Announces Middle East Expansion - Seeking Alpha
16. ↑ Bloomberg.com, US Rates and Funds
17. ↑ Bloomberg.com, UK Rates and Bonds
18. ↑ M&A Bubble Bursts - WSJ.com
19. ↑ UBS 3Q2007 Overview
20. ↑ M&A Bubble Bursts - WSJ.com
21. ↑ Credit Suisse (CS) - Google Finance
22. ↑ UBS AG (UBS) - Google Finance