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