UBS’s underperformance hasn’t prevented it from trading at a higher price relative to estimated earnings and book value, as some investors embrace the Zurich-based bank’s focus on wealth management and question Credit Suisse’s decision to remain a full-service investment bank.
“UBS made it clear that it will focus on private banking,” said Florian Esterer, a senior portfolio manager who helps oversee about $3.8 billion at MainFirst Schweiz AG in Zurich. “Credit Suisse is being punished for still being active in all areas of the investment bank, without there being evidence that it has enough scale or that it can make good returns on equity.”
Credit Suisse will probably report first-quarter net income of 1.31 billion Swiss francs ($1.4 billion) tomorrow, up from 44 million francs a year earlier, when it booked a charge tied to its own debt, according to the average estimate of eight analysts surveyed by Bloomberg. UBS profit probably fell by half to 410.2 million francs, hurt by costs related to its reorganization, a survey of five analysts found. UBS reports earnings April 30.
Even so, Credit Suisse traded at 9.8 times estimated 2013 earnings and 0.97 times book value at the market close yesterday, while UBS traded at 16.8 times this year’s estimated profit and 1.16 times book value, data compiled by Bloomberg show.
Concentrating on money management, which carries lower capital requirements than securities businesses, enabled UBS Chief Executive Officer Sergio Ermotti to shrink the company faster than competitors. The 52-year-old CEO announced plans on Oct. 30 to retreat from capital-intensive debt trading and to eliminate 10,000 jobs to bolster profitability.
Credit Suisse CEO Brady Dougan, 53, plans to keep a full-fledged investment bank. Dougan has announced 4.4 billion francs in cost-cutting programs since 2011, which he plans to complete by the end of 2015 to boost earnings. The firm also trimmed risk-weighted assets at the investment bank.
UBS shrank its assets, excluding derivatives, by 1.2 trillion francs, or 59 percent, to 841.2 billion francs from 2006 through last year, and plans to cut this so-called funded balance sheet to about 600 billion francs by the end of 2015. Credit Suisse, which trimmed assets by 26 percent in the same period, to 924.3 billion francs, plans to bring the figure below 900 billion francs this year.
UBS and Credit Suisse use different accounting standards for their financial reports, making UBS’s assets appear greater because it doesn’t net out derivatives like Credit Suisse. Although UBS is 5.2 percent smaller by assets excluding derivatives, based on data compiled by Bloomberg from company reports, its market value of 57.5 billion francs is 41 percent larger than Credit Suisse’s.
UBS rose 0.8 percent to 14.98 francs by 10:42 a.m. in Swiss trading, bringing the gain in the past 12 months to 34 percent. That exceeds the 14 percent increase in Credit Suisse and the 22 percent advance in the 40-company Bloomberg Europe Banks and Financial Services Index over the past year.
“Credit Suisse’s deleveraging plan is nearly at its end, but UBS’s has a lot more to go,” said Andrew Lim, a London-based analyst at Espirito Santo Investment Bank. “This hasn’t actually been done before in terms of the magnitude of what UBS is trying to achieve. There is a lot more upside to be seen in terms of return on equity improvement and the amount of capital that can be returned.”
UBS is seeking a return on equity, a measure of profitability, of at least 15 percent starting in 2015, while Credit Suisse targets the same over the business cycle. UBS’s common equity ratio under fully applied Basel III rules was 9.8 percent at the end of 2012, and Credit Suisse’s was 8 percent.
Lim rates UBS a buy and Credit Suisse neutral. Among 41 analysts who follow the two banks, 54 percent have buy ratings on UBS, compared with 42 percent for Credit Suisse.
Morgan Stanley analysts last month removed Credit Suisse from their “most preferred” list and added UBS, citing better dividend prospects.
“We think confidence will build over UBS potentially having a special dividend in 2015 from faster deleveraging,” the analysts, led by Huw van Steenis, wrote in a March 25 report. “Meanwhile, we think Credit Suisse will deliver on costs and top line but think may take longer to return to a 100 percent cash dividend.”
UBS plans to raise its dividend for 2012 by 50 percent to 15 centimes a share, after paying its first cash dividend in five years the previous year. Credit Suisse proposed a payout of 10 centimes in cash and 65 centimes in shares for 2012, after letting shareholders choose the previous year whether they wanted 75 centimes a share in cash or in stock to help the company increase its capital ratios.
Credit Suisse is seen earning more than UBS this year and next, according to analysts’ estimates compiled by Bloomberg.
“The good news for Credit Suisse is that unlike UBS they have an investment bank which can make money,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA who rates Credit Suisse outperform and UBS neutral.
UBS’s decision to scale back its investment bank followed more than $50 billion of losses during the subprime crisis that resulted in a state rescue, and a $2.3 billion loss from unauthorized trading by former employee Kweku Adoboli in 2011.
“There is a lot more potential at UBS to fulfill,” Lim said. “If you’re shrinking your assets so aggressively, and maintaining or indeed improving your profitability, then it’s a great thing.”
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