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-'''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.<ref>[http://www.cnbc.com/id/31756797 Bank of America Topples UBS as World Wealth Manager, CNBC July 6, 2009]</ref> It offers wealthy individuals investment management and financial planning services, as well as advises large corporations on [[mergers and acquisitions | mergers and acquisitions]] and helps them to raise capital through debt and equity offerings.+'''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.<ref>[http://www.cnbc.com/id/31756797 Bank of America Topples UBS as World Wealth Manager, CNBC July 6, 2009]</ref> It offers wealthy individuals investment management and financial planning services, as well as advises large corporations on [[mergers and acquisitions | mergers and acquisitions]] and helps them to raise capital through debt and equity offerings. For the full year 2010, UBS reported a total revenue of $42.6B and a net income of $7.7B.
- +Swiss banking and privacy laws create a [[Competitive advantage | 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.<ref>[http://www.reuters.com/article/fundsFundsNews/idUSSIN3574820070920 Janus opens Singapore office to tap Southeast Asia | Funds | News | Reuters]</ref>
-Swiss banking and privacy laws create a [[Tax Haven | tax haven]] for many tax evaders, but these same privacy laws are a [[Competitive advantage | 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.<ref>[http://www.reuters.com/article/fundsFundsNews/idUSSIN3574820070920 Janus opens Singapore office to tap Southeast Asia | Funds | News | Reuters]</ref>+
==Business Overview== ==Business Overview==
===Business Segments=== ===Business Segments===
 +For the full year 2010, UBS reported a total revenue of $42.6B and a net income of $7.7B.
====Wealth Management & Swiss Bank (54.7% of 2010 Pre-Tax Income)==== ====Wealth Management & Swiss Bank (54.7% of 2010 Pre-Tax Income)====
-This division serves [[High Net Worth Individuals (HNIs)|wealthy individuals]] with private banking and asset management services. Starting 2010, external reporting of Wealth Management & Swiss Bank was revised to better reflect management structure and responsibilities, and was split into two business units: Wealth Management and Retail & Corporate. The Investment Products and Services (IPS) unit was created to provide comprehensive service to Wealth Management clients with complex needs using the capabilities and expertise of the entire firm.+This division serves [[High Net Worth Individuals (HNIs)|wealthy individuals]] with private banking and asset management services. The external reporting of Wealth Management & Swiss Bank is split into two business units: Wealth Management and Retail & Corporate. The Investment Products and Services (IPS) unit was created to provide comprehensive service to Wealth Management clients with complex needs using the capabilities and expertise of the entire firm.
- +
-In 2010, the division reported a pre-tax income of CHF 4,080 million, a 4.3% increase over CHF 3,910 million in 2009.+
- +
-'''Wealth Management''' - In 2010, pre-tax profit increased 1% to CHF 2,308 million from CHF 2,280 million in 2009.+
- +
-'''Retail & Corporate''' – In 2010, pre-tax profit increased 9% to CHF 1,772 million compared with CHF 1,629 million in 2009.+
====Wealth Management Americas (Loss of CHF 130 Million)==== ====Wealth Management Americas (Loss of CHF 130 Million)====
This segment serves high net worth individuals and families through its U.S., Canadian, and Brazilian offices. <ref>[http://www.reuters.com/article/idUSLDE63S2EH20100429?type=marketsNews Reuters "UBS Agrees to buy Brazilian Brokerage" 4/29/10]</ref> UBS plans to re-establish its presence in Brazil through the purchase with the creation of UBS Brasil Banco de Investimentos. This segment serves high net worth individuals and families through its U.S., Canadian, and Brazilian offices. <ref>[http://www.reuters.com/article/idUSLDE63S2EH20100429?type=marketsNews Reuters "UBS Agrees to buy Brazilian Brokerage" 4/29/10]</ref> UBS plans to re-establish its presence in Brazil through the purchase with the creation of UBS Brasil Banco de Investimentos.
-In 2010, the division reported a pre-tax loss of CHF 130 million in 2010 compared with a pre-tax profit of CHF 32 million in 2009, due to higher litigation provisions. 
====Global Asset Management (6.9% of 2010 Pre-Tax Income)==== ====Global Asset Management (6.9% of 2010 Pre-Tax Income)====
This segment 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. This segment 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.
-In 2010, the division reported a pre-tax profit of CHF 516 million compared with CHF 
-438 million in 2009. 
====Investment Banking (29.5% of 2010 Pre-Tax Income)==== ====Investment Banking (29.5% of 2010 Pre-Tax Income)====
This segment provides securities research, debt and equity underwriting, and mergers and acquisitions (M&A) advisory services, to corporate, institutional, and alternative asset management clients. This segment provides securities research, debt and equity underwriting, and mergers and acquisitions (M&A) advisory services, to corporate, institutional, and alternative asset management clients.
-In 2010, the division reported a pre-tax profit of CHF 2,197 million compared with a pre-tax loss of CHF 6,081 million in 2009, primarily as a result of increased revenues in fixed income, currency and commodities, a significant reduction in net credit loss expenses and lower own credit losses. Investment banking revenues were CHF 2,414 million in 2010, marginally down from CHF 2,466 million in the previous year. 
====Treasury Activities and other Corporate Items (10.6% of 2010 Pre-tax Profit)==== ====Treasury Activities and other Corporate Items (10.6% of 2010 Pre-tax Profit)====
-The Corporate Center allocates operating expenses to the business divisions according to service consumption. +The Corporate Center allocates operating expenses to the business divisions according to service consumption.
==Trends and Forces== ==Trends and Forces==
-===Impact of Basel III Rules on Big Banks===+===Impact of Basel III and other financial regulation on Big Banks===
-The Basel Committee on Banking Supervision announced new regulations which ultimately will force banks to have 10.5% of total capital on hand against liabilities. The new rules are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans. Requiring banks to hold more capital on hand will limit the amount of money they can lend out, but also reduce the risk of insolvency given many loan defaults. +The Basel III rules as well as other financial regulation may force banks to increase the amount of money they hold against liabilities. While the goal of the regulation is to prevent banks from becoming over leveraged, they may also prevent the banks from creating the same profit margins that they previously were able to attain.<ref>[http://www.huffingtonpost.com/2010/09/13/basel-iii-rules-market-we_n_714263.html The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10]</ref>
- +
-Under the new regulations, the mandatory Tier 1 capital reserve would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019. Banks would also be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent. Ultimately, the amount of rock-solid reserves each bank is expected to have will amount to 8.5 percent of assets. Also, the rules eliminate the ability to count deferred tax assets, some mortgage servicing rights and trust preferred securities as assets.+
- +
-The potential impact of the regulations on US banks is rather limited because as of September 2010, 61 of 62 US banks with assets of more than $10 billion meet the requirements, therefore, banks such as [[Morgan Stanley]], [[Goldman Sachs Group (GS)]], [[J P Morgan Chase (JPM)]], and [[Citigroup (C)]] will not see their businesses change with the passing of these rules.+
- +
-Some major European banks, specifically Switzerland's two largest UBS and Credit Suisse, may face additional requirements because of the their immense to the Swiss economy and the possible harm a collapse would pose to the country.+
- +
-The rules must still be presented to the leaders of the Group of 20 rich and developing nations at a meeting in November 2010 before they can be ratified by national governments, but the general consensus is that these rules will pass.<ref>[http://www.huffingtonpost.com/2010/09/13/basel-iii-rules-market-we_n_714263.html The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10]</ref>+
- +
-===Passing European Stress Test Test Creates Positive Sentiment for Banks===+
-On July 7, 2010, the Committee of European Bank Supervisors (CEBS) outlined a stress test that simulated the impact of a severe economic shock on 91 banks in the euro zone, Great Britain, Sweden and Denmark. European banks were given stress templates on July 6 and delivered their answers on July 15. The stress tests outlined scenarios which simulated the banks undergoing a recession and a decline in the value of the government bond holdings.+
- +
-On July 22, 2010, the results of the stress test were released in which 84 of the 91 banks passed the test, including UBS. No systematically important bank failed. Positive and sentiment and optimism should stem from the positive results of the stress tests, creating greater consumer and investor confidence in these banks. Such optimism would lower risk premiums on european government and corporate bonds as well as increase european bank stock prices.<ref name = EUTests>[http://www.nytimes.com/2010/07/31/business/global/31stress.html?src=busln The New York Times "European Bank Stress Tests Worked: Sort Of" 7/30/10]</ref>+
===Refocus on core businesses=== ===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.<ref name=Too>[http://www.theglobeandmail.com/report-on-business/too-big-to-fail-a-swiss-icon-swings-back-to-life/article1259465/ The Globe and Mail, "Too big to fail, a Swiss icon swings back to life," Eric Reguly, 08/21/2009]</ref> This profit contribution was more than 8x more than the standard investment division's profits. UBS' aggressive investments has backfired since the [[mortgage backed securities| asset backed securities]] market crashed and the [[2007 Credit Crunch]]. It is believed that they invested up to $100 billion into those securities.<ref name=Too/>+UBS' business plan historically focused primarily on investment banking and wealth management.<ref name=Too>[http://www.theglobeandmail.com/report-on-business/too-big-to-fail-a-swiss-icon-swings-back-to-life/article1259465/ The Globe and Mail, "Too big to fail, a Swiss icon swings back to life," Eric Reguly, 08/21/2009]</ref> However, UBS' aggressive investments has backfired since the [[mortgage backed securities| asset backed securities]] market crashed. <ref name=Too/>
-In 2008, UBS restructured its divisions in the hopes of focusing on its most profitable businesses and reducing its presence in risky areas.<ref>[http://www.reuters.com/article/marketsNews/idUSLC39673720080812 Reuters, "Key details of UBS restructuring plans," 08/12/2008]</ref> It separated its wealth management divisions to focus on driving growth for its Swiss Bank and increasing its presence in [[Emerging Markets | emergins markets]], such as Brazil and China. These divisions contributed 26% of [[Income Before Taxes | 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. On April 20, 2010, UBS agreed to sell its Brazilian business back to its original owners for about $2.5 billion, boosting its capital despite a small loss, and potentially reducing the need for a capital hike. The sale is one of the biggest indication of foreign banks moving out of the Brazilian economy due to financial problems in their home countries. UBS struggles to return to profitability and rebuild its brand after substantial investments made in U.S. risky assets forced it to write down billions and accept government support.<ref>[http://www.reuters.com/article/idUSLK56002820090420?rpc=21 Reuters "UBS to sell Brazil unit Pactual for $2.5 billion" 4/20/10]</ref>+As a result, UBS restructured its divisions in the hopes of focusing on its most profitable businesses and reducing its presence in risky areas.<ref>[http://www.reuters.com/article/marketsNews/idUSLC39673720080812 Reuters, "Key details of UBS restructuring plans," 08/12/2008]</ref> It separated its wealth management divisions to focus on driving growth for its Swiss Bank and increasing its presence in [[Emerging Markets | emergins markets]], such as Brazil and China. As UBS moves away from its investment banking and wealth management segments, its refocusing may allow it to gain increased stablity. However, the decrease in exposure to risk may also prevent the company for achieving the same level of profits it was historically able.<ref>[http://www.reuters.com/article/idUSLK56002820090420?rpc=21 Reuters "UBS to sell Brazil unit Pactual for $2.5 billion" 4/20/10]</ref>
===U.S. tax evasion lawsuits and pressure on Swiss bank secrecy laws=== ===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 advantage | 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.<ref>[http://www.atimes.com/atimes/Asian_Economy/HF08Dk01.html Global Economy - Speaking Freely: A Tale of Two Cities – Asia Times Online]</ref> +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 advantage | 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.<ref>[http://www.atimes.com/atimes/Asian_Economy/HF08Dk01.html Global Economy - Speaking Freely: A Tale of Two Cities – Asia Times Online]</ref> Changes in the rule regarding the disclosure of information in Switzerland may cause UBS to lose its reputation for maintaining high levels of privacy.
-In July 2009, UBS and the United States IRS agreed to settle a would-be long running tax evasion lawsuit.<ref>[http://www.reuters.com/article/businessNews/idUSTRE57B2CF20090812?pageNumber=2&virtualBrandChannel=11611 Reuters, "UBS, U.S. settle tax evasion case," Jonathan Stempel, 08/12/2009]</ref> UBS is expected to disclose between 3,000 to 10,000 American account-holders suspected of using offshore accounts to avoid taxes.<ref name=FO>[http://www.forbes.com/feeds/reuters/2009/08/12/2009-08-12T163656Z_01_N1296068_RTRIDST_0_UBS-TAX-UPDATE-4.html Forbes, "UBS/TAX (UPDATE 4):UBS, U.S. settle tax evasion case," Pascal Fletcher and Jim Loney, 08/12/2009]</ref> In total, the US believes that close to $18b is being hidden in UBS by wealthy US clients.<ref>[http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4348822.ece Times Online, "US claims UBS 'colluded' behind secrecy laws," Miles Costello and Agencies, 07/17/2009]</ref> 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<ref name=FO/>+
===Emerging economies provide strong growth=== ===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, [[Revenue - Middle East | the Middle East]], and Brazil. Many of these economies have been growing very rapidly, leading to an increased number of [[Mass Affluent | 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.<ref>[http://seekingalpha.com/article/84272-ubs-announces-middle-east-expansion?source=feed UBS Announces Middle East Expansion - Seeking Alpha]</ref> In this way, UBS hopes to expand its existing customer base and position itself for strong growth in the future.+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, [[Revenue - Middle East | the Middle East]], and Brazil. Many of these economies have been growing very rapidly, leading to an increased number of [[Mass Affluent | 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.<ref>[http://seekingalpha.com/article/84272-ubs-announces-middle-east-expansion?source=feed UBS Announces Middle East Expansion - Seeking Alpha]</ref> 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=== ===Low interest rates benefit UBS===
-[[Image:Interest Rate Trends.png|thumb|right|350px|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. Rising interest rates raise the cost of borrowing for all lenders, dampening the overall [[U.S. Housing market|demand for mortgages]] and other home loan products.<ref>[http://www.bloomberg.com/apps/quote?ticker=FDFD:IND Bloomberg.com, US Rates and Funds]</ref><ref>[http://www.federalreserve.gov/fomc/fundsrate.htm Federal Reserve Board "Open Market Operations" 16 Dec 2008]</ref>
-[[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 [[Initial Public Offerings | 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 [[Federal Reserve | 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 [[Bank of England Base Rate | rates]] from 5% in July 2008 to 0.5% in July 2009.<ref>[http://www.bloomberg.com/apps/quote?ticker=FDFD:IND Bloomberg.com, US Rates and Funds]</ref><ref>[http://www.bloomberg.com/markets/rates/uk.html Bloomberg.com, UK Rates and Bonds]</ref>+ 
 +===Benefits of Changes in Tax Law===
 +Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Proposed fiscal legislative reform which would effectively increase the capital gains tax paid by private equity firms and other money managers could increase the rate of IPOs in the short term. The rise in IPOs would be a result of money managers and PE firms attempting to avoid an increase in capital gains tax.<ref>[http://www.huliq.com/9990/us-tax-law-changes-2011-increase-private-equity-deals Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010]</ref>
-===Changes in Corporate Tax Law Helps Investment Banking Fees=== 
-Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Newly proposed fiscal legislative reform for 2011, which will effectively increase the capital gains tax paid by private equity firms and other money managers from 15% to between 20% and 30%. This tax increase creates incentives for such firms to exit their profitable positions and move to launch initial public offerings (IPO) before the change in tax law takes effect in 2011. This is increase in IPO activity directly translates into an increase in fee for investment banks handling the private equity IPO deals.<ref>[http://www.huliq.com/9990/us-tax-law-changes-2011-increase-private-equity-deals Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010]</ref> 
-===Fed Proposes New Legislation to Prevent Money Laundering===+===Federal Regulation on Money Laundering===
-The U.S. Treasury has proposed a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. Several global banks have lately had issues with money laundering probes. [[Barclays]] and Wachovia, now part of [[Wells Fargo (WFC)]] have agreed to large settlements in 2010. UBS has suffered a substantial $780 million fine due to such issues.<ref>[http://www.thestreet.com/story/10872169/1/feds-push-banks-on-money-laundering.html The Street "Feds Push Banks on Money Laundering" 9/27/10]</ref>+The U.S. Treasury may enact a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. Because UBS is located in Switzerland, where banks are allowed to provide high levels of privacy to their customers, they are often suspected of being used by money launderers. <ref>[http://www.thestreet.com/story/10872169/1/feds-push-banks-on-money-laundering.html The Street "Feds Push Banks on Money Laundering" 9/27/10]</ref> Even if none of UBS's clients are involved in money laundering, the increased regulation could increase the cost of operation for the firm.
==Competition== ==Competition==
Line 78: Line 54:
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. 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.
-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 7% market share of the mergers and acquisitions (M&A) advisory market.+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.
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. <ref name = M&A2010/> 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. <ref name = M&A2010/>

Current revision

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.[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. For the full year 2010, UBS reported a total revenue of $42.6B and a net income of $7.7B.

Swiss banking and privacy laws create 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.[2]

Business Overview

Business Segments

For the full year 2010, UBS reported a total revenue of $42.6B and a net income of $7.7B.

Wealth Management & Swiss Bank (54.7% of 2010 Pre-Tax Income)

This division serves wealthy individuals with private banking and asset management services. The external reporting of Wealth Management & Swiss Bank is split into two business units: Wealth Management and Retail & Corporate. The Investment Products and Services (IPS) unit was created to provide comprehensive service to Wealth Management clients with complex needs using the capabilities and expertise of the entire firm.

Wealth Management Americas (Loss of CHF 130 Million)

This segment serves high net worth individuals and families through its U.S., Canadian, and Brazilian offices. [3] UBS plans to re-establish its presence in Brazil through the purchase with the creation of UBS Brasil Banco de Investimentos.


Global Asset Management (6.9% of 2010 Pre-Tax Income)

This segment 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 (29.5% of 2010 Pre-Tax Income)

This segment provides securities research, debt and equity underwriting, and mergers and acquisitions (M&A) advisory services, to corporate, institutional, and alternative asset management clients.


Treasury Activities and other Corporate Items (10.6% of 2010 Pre-tax Profit)

The Corporate Center allocates operating expenses to the business divisions according to service consumption.

Trends and Forces

Impact of Basel III and other financial regulation on Big Banks

The Basel III rules as well as other financial regulation may force banks to increase the amount of money they hold against liabilities. While the goal of the regulation is to prevent banks from becoming over leveraged, they may also prevent the banks from creating the same profit margins that they previously were able to attain.[4]

Refocus on core businesses

UBS' business plan historically focused primarily on investment banking and wealth management.[5] However, UBS' aggressive investments has backfired since the asset backed securities market crashed. [5] As a result, UBS restructured its divisions in the hopes of focusing on its most profitable businesses and reducing its presence in risky areas.[6] 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. As UBS moves away from its investment banking and wealth management segments, its refocusing may allow it to gain increased stablity. However, the decrease in exposure to risk may also prevent the company for achieving the same level of profits it was historically able.[7]

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.[8] Changes in the rule regarding the disclosure of information in Switzerland may cause UBS to lose its reputation for maintaining high levels of privacy.

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.[9] 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

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. Rising interest rates raise the cost of borrowing for all lenders, dampening the overall demand for mortgages and other home loan products.[10][11]


Benefits of Changes in Tax Law

Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Proposed fiscal legislative reform which would effectively increase the capital gains tax paid by private equity firms and other money managers could increase the rate of IPOs in the short term. The rise in IPOs would be a result of money managers and PE firms attempting to avoid an increase in capital gains tax.[12]


Federal Regulation on Money Laundering

The U.S. Treasury may enact a rule requiring U.S. banks to report all electronic transfers of funds in and out of the country. Previously, banks were required to report only fund transfers in excess of $3,000 and cash transfers over $10,000. The new rule would not apply to credit card and ATM transactions. The rule is an attempt by U.S. government officials to crack down on money laundering. Because UBS is located in Switzerland, where banks are allowed to provide high levels of privacy to their customers, they are often suspected of being used by money launderers. [13] Even if none of UBS's clients are involved in money laundering, the increased regulation could increase the cost of operation for the firm.

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.

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.

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. [14]


References

  1. Bank of America Topples UBS as World Wealth Manager, CNBC July 6, 2009
  2. Janus opens Singapore office to tap Southeast Asia | Funds | News | Reuters
  3. Reuters "UBS Agrees to buy Brazilian Brokerage" 4/29/10
  4. The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10
  5. 5.0 5.1 The Globe and Mail, "Too big to fail, a Swiss icon swings back to life," Eric Reguly, 08/21/2009
  6. Reuters, "Key details of UBS restructuring plans," 08/12/2008
  7. Reuters "UBS to sell Brazil unit Pactual for $2.5 billion" 4/20/10
  8. Global Economy - Speaking Freely: A Tale of Two Cities – Asia Times Online
  9. UBS Announces Middle East Expansion - Seeking Alpha
  10. Bloomberg.com, US Rates and Funds
  11. Federal Reserve Board "Open Market Operations" 16 Dec 2008
  12. Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010
  13. The Street "Feds Push Banks on Money Laundering" 9/27/10
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