One year on from Credit Suisse deal, $100bn UBS finally has the scale to take on Wall Street
Swiss banking giant UBS has reinforced its status as one of the world’s leading wealth managers after its market capitalisation sailed past $100bn (£79bn) shortly before the first anniversary of its landmark deal to acquire rival Credit Suisse.
The majority (60 per cent) of UBS’ revenue comes from wealth and asset management. The wealth business is one that many other firms, including Goldman Sachs and Morgan Stanley, are trying to make more important to their models as it uses lower capital and generates less volatile earnings than investment banking.
UBS triggered the biggest banking merger since the financial crisis last March when it agreed to buy domestic rival Credit Suisse. The state-brokered deal came after years of scandal at the latter firm, resulting in mass client outflows and a share slump.
Credit Suisse confirmed last April that its clients had pulled more than 61bn Swiss francs (£55bn) worth of assets at the start of 2023.
The deal was a bargain for UBS, which paid just $3.2bn for a bank that had an estimated tangible book value of roughly $33bn.
After the deal was finalised last June, UBS’ wealth management client funds shot up roughly a fifth to $3.4tn as it took on new clients from its former rival. Its market capitalisation has more than doubled in the last year to its highest level in 16 years as investors expect bumper returns.
UBS is easily the biggest wealth manager in Europe and dominates many other markets around the world. But while around half of its invested assets sit in the Americas accounts, the bank has struggled to compete with Wall Street titans led by Morgan Stanley.
UBS’ Americas wealth division generated $2.56bn in revenue and $102m in profit last quarter – a margin of nearly four per cent. While analysts expect this profit margin to increase to between 10 per cent and 15 per cent over the next three years, it would still be roughly half the figure enjoyed by the likes of Morgan Stanley, Bank of America and JP Morgan.
Efforts to ramp up its direct challenge to Wall Street have recently proven unsuccessful. In 2022, UBS ditched a $1.4bn acquisition of robo-adviser Wealthfront after it proved unpopular with investors.
Later that year, UBS chair Colm Kelleher ruled out further US acquisitions, saying: “The message in the states is organic growth, no optionality, no distractions, no M&A.”
With the scale bought by Credit Suisse and its assets, UBS is now looking to grow its wealth arm’s invested assets to more than $5tn by the end of 2028 from their current level of $3.8tn.
Chief executive Sergio Ermotti is aiming to win back Credit Suisse clients who left the bank shortly before it collapsed and take in $100bn of net new assets a year by 2025 – pricing in expected outflows from its repricing of Credit Suisse’s products.
Alison Williams, an analyst at Bloomberg Intelligence, told Morning Wire: “One year on after its acquisition of Credit Suisse, UBS’ key accomplishment is the general stabilisation of its global wealth franchise, evident in net new asset inflows in 4Q, with strength in the key Asia region as well as the Americas.
“Swiss inflows were also positive, though EMEA showed a bit of lingering deal fallout with outflows related to the Credit Suisse platform. US competitors may still be going after selective hires, but the talk has moderated from a year ago.”
Williams added: “UBS has a path to return to buybacks in the second half, which could bring its payout back to above US peers, as well as the growing ratio at Deutsche Bank, though its sizeable restructuring brings uncertainty and profitability will remain pressured in the near-term. US peers remain relatively cautious on buybacks given regulatory uncertainty.”
UBS’ management has acted swiftly over the last 12 months to ditch Credit Suisse’s unprofitable businesses and work towards fully integrating its Swiss banking unit by the end of 2026.
It has stripped out thousands of roles within the combined group to avoid duplication, with further layoffs expected as the merger moves along.
The process has been costly, with UBS posting two straight quarterly net losses following the acquisition that totalled $1.1bn. The cost of integrating the two firms’ legal entities, IT applications and data has proven especially sticky.
Europe’s largest activist investor, Cevian Capital, placed a roughly £1bn bet on the merger’s success in December. It said UBS’ share price could reach as high as 50 Swiss francs “if the valuation gap to Morgan Stanley” could be closed. The bank’s shares are currently trading at just under 28 Swiss francs.
UBS is now under greater regulatory pressure after removing its only real source of competition in Switzerland and growing its balance sheet to more than double the size of the country’s economy.
In a report on Tuesday, the Swiss central bank called for regulators to review UBS’ capital requirements as its “systemic importance” had “increased considerably with the acquisition of Credit Suisse”.
The Swiss Financial Market Supervisory Authority (FINMA) is due to publish a report next month on its overhauls to financial regulation following the near-collapse of Credit Suisse.
The shotgun merger has sparked various lawsuits around the world, including claims on behalf of holders of about 16 billion Swiss francs (£14bn) of bonds that regulators unexpectedly wrote down to zero.