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UBS AG (NYSE:UBS) is a leading global financial services firm. As the largest wealth and asset manager in the world, UBS offers wealthy individuals investment management and financial planning services. UBS's investment bank also advises large corporations on mergers and acquisitions and helps them to raise capital through debt and equity offerings.
With the 2007 fallout in the subprime mortgage industry, UBS found itself stuck with billions of dollars worth of highly leveraged debt, forcing write-downs of over $13 billion in 2007 and $24 billion in the first six months of 2008.[1][2] At the same time, growth in UBS's private banking division slowed,[3] which prompted UBS to separate its wealth management business from its investment banking and asset management divisions.[4] Additionally, UBS has faced investigations from state and federal authorities regarding its role in tax evasion and the collapse of the auction-rate securities market; as a result, UBS decided to stop offering U.S. clients the Switzerland-based bank accounts that fall outside of U.S. regulators' jurisdiction,[5][6] and it agreed to buy back $18.6 billion of auction-rate securities from clients.[7] 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 there, positioning itself to benefit from these regions’ explosive growth.[8]
[edit] Business Overview
Zürich, Switzerland-based UBS was formed in 1998 by the merger of the Union Bank of Switzerland with the Swiss Bank Corporation. Since then, the firm has grown to become the largest asset manager in the world, with $2.13 trillion in client assets under management as of September 30, 2007, as well as a premier investment bank.[10]
UBS operates in five divisions:
- Global Wealth Management & Business Banking serves affluent and high-net-worth individuals with private banking and asset management services.
- Global Asset Management manages investments for individual, institutional, and corporate clients across the world. The types of investments covered by this division include assets such as equities, fixed income, alternative assets like hedge funds, and real estate investments.
- Investment Banking and Securities 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 serves Swiss individuals and corporations, offering a range of retail banking and securities products and services.
- Industrial Holdings encompasses UBS's non-financial services businesses, primarily its private equity investments. Currently, UBS is seeking profitable exit opportunities for its private equity holdings and, ultimately, to decrease its presence in the industry.
[edit] Trends and Forces
[edit] Credit crunch could still hurt earnings
Continuing deterioration in the global credit markets would have a substantially negative impact on UBS. As of October 31, 2007, UBS held around $24 billion in securities that needed to be repackaged and sold.[11] Unfortunately, the market for collateralized debt obligations (CDOs) had all but disappeared, forcing UBS to hold these securities and take losses as their market value fell. In 2007 alone, the firm took around $13.5bn in write-downs on these securities.[12] Further declines in the demand for these CDOs could cause UBS to suffer additional losses. Though CDOs and other risky securities only accounted for a small portion of the firm’s assets as of 2007, many of them were highly leveraged; as such, a decline in their value would have a much larger impact on UBS’s total equity.
[edit] Low interest rates benefit UBS
Interest rates can be thought of as the cost of borrowing money. Though the impact of interest rates spans across the economy, businesses and lenders are particularly sensitive to fluctuations in interest rates. As interest rates increase, businesses are less likely to issue debt or equity given that the price of borrowing has increased. U.S. interest rates have, however, been fairly low since 2004, which has played a significant role in driving business activities. UBS has benefited from high levels of mergers and acquisitions, underwriting, and IPO activities over the last three years. The 2007 rate cuts by the U.S. Federal Reserve and Central Bank of England, as well as low rates in Switzerland, could all benefit UBS by reducing the cost of borrowing and stimulating business activities.
[edit] Changes to Swiss privacy laws could hurt reputation
Pressure from the European Union to crack down on 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. In recent years, however, the European Union has increasingly pushed for greater transparency in the Swiss banking system, presumably for the purpose of deterring money laundering and tax evasion. 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 accountholders with greater privacy.[13] Nonetheless, any significant changes to the Swiss banking laws could impact UBS’s global image and be detrimental to the firm’s core private banking and wealth management divisions.
[edit] 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.[14] In this way, UBS hopes to expand its existing customer base and position itself for strong growth in the future.
[edit] Competition
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.[16]
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.[17]
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[18], compared to UBS's posted loss of $710m.[19]
[edit] References
- ↑ Subprimes force UBS to write down $10b
- ↑ Reuters Article on UBS' Q1 `08 writedown.
- ↑ UBS, Merrill Private Banking Growth Slows on Subprime
- ↑ Key details of UBS restructuring plans | Markets | Markets News | Reuters
- ↑ EU raises pressure on Swiss to tighten corporate tax rules – International Herald Tribune
- ↑ UBS Move Will Affect U.S. Clients - WSJ.com
- ↑ UBS To Buy Back $18.6 Billion In ARS To End Probes
- ↑ Janus opens Singapore office to tap Southeast Asia | Funds | News | Reuters
- ↑ UBS 3Q2007 Financial Report
- ↑ UBS 3Q2007 Overview
- ↑ UBS: Waiting for the CDO Shoe to Drop – Seeking Alpha
- ↑ UBS posts fresh $10bn write-down – BBC News | Business
- ↑ Global Economy - Speaking Freely: A Tale of Two Cities – Asia Times Online
- ↑ UBS Announces Middle East Expansion - Seeking Alpha
- ↑ M&A Bubble Bursts - WSJ.com
- ↑ UBS 3Q2007 Overview
- ↑ M&A Bubble Bursts - WSJ.com
- ↑ Credit Suisse (CS) - Google Finance
- ↑ UBS AG (UBS) - Google Finance
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