Why Credit Suisse and UBS shares are overvalued
Swiss brands bounce back from losses
The Swiss brand in global private banking and offshore wealth management was severely damaged by the $57 billion in losses amassed by UBS in its proprietary trading and capital markets businesses under disgraced former chairman Marcel Ospel and CEO Peter Wuffli. UBS was no ordinary Wall Street investment banking gunslinger but the world's largest wealth manager, the crown jewel of the Swiss Confederation's $3 trillion offshore banking industry. UBS only survived due to a secret swap line arranged by the Federal Reserve with the Swiss National Bank. An entire generation of Swiss bankers were humiliated in the full glare of the world financial markets. UBS was later fined $750 million by the Justice Department for helping US clients evade income taxes, lost $2 billion in a rogue trader scandal and was ensnared in the Libor rigging scheme and chose to exit global investment banking, axing 10,000 jobs. UBS was forced to reinvent its business model under its new chairman Axel Weber, former head of the German Bundesbank and CEO Sergio Ermotti in 2012.
Five years later, the new UBS is rooted in its role as one of the world's top private wealth managers, with more than $1 trillion in assets under management in the United States (thank you, Paine Webber!) and 300 billion Swiss francs in Asia Pacific booked out of Hong Kong. I have no idea how much UBS manages in Dubai but the bank sure puts on some great Diwali parties. It is not often I see staid Swiss-German private bankers dancing to Bollywood hits in kurta pajama. Grutzi, Herr Private Bankerji!
UBS trades at 16.8 Swiss francs in Zurich as I write. This means UBS trades at 11 times earnings and 1.3 times tangible book value, a rich valuation at a time when the global asset gathering model faces myriad market, competitive and regulatory risk. I expect UBS shares to fall to 14 Swiss francs this summer. Why?
One, UBS return on tangible equity was only nine per cent in the first quarter, far below Ermotti's 15 per cent target. Two, UBS has provisioned 2.9 billion Swiss francs for litigation and regulatory compliance provisions, whose cycle has not peaked. Three, the oil crash, recession and banking cash crunches have gutted new money inflows from the GCC, West Africa and Russia, misnamed "growth markets" for wealth management. Four, the US business experiences $3-4 billion in seasonal, tax related client outflows. Five, private clients are still risk averse in the eighth year of the US equities bull market. One-third of UBS managed assets are in cash, laments Signore Ermotti.
Six, the G-20 common reporting standards will make tax evasion impossible even in offshore markets. Swiss banking secrecy no longer exists, at least not for Uncle Sam or the EU. Seven, cross-border tax "regularisation" could well cost UBS 14 billion Swiss francs in client outflow. Eight, UBS is a "too big to fail" global systemic risk bank. Hence it has to maintain a Basel Tier One capital ratio of 14 per cent. Nine, negative forward rates will pressure margins in UBS's Swiss personal/corporate bank. Ten, the flattening of the US Treasury debt/yield curve is negative for US profit growth. Eleven, UBS return on equity peaked in 2014 and has since plunged 30 per cent, a bad omen. UBS shares are vulnerable to a valuation derating, the rationale for my 14 CHF target. Note that, after $5 billion in losses, Singapore sovereign wealth fund JIC slashed its strategic stake in UBS.
Credit Suisse shares were a no brainer buy at 10 Swiss francs last July. At 14.6 Swiss francs, the bank trades at 10 times earnings and 0.9 times tangible book value. The bank has announced a four billion capital raise that will dilute shareholders by at least 12 per cent. While the capital raise removes the necessity of a Swiss Universal Bank IPO, the fundamental problem at Credit Suisse is a low profit product mix, bloated costs, an investment bank that needs to be downsized and suboptimal scale in international wealth management and two successive years of negative returns on equity. Credit Suisse cannot be a credible wealth manager with a Basel common equity Tier One ratio of 11.7 per cent. The finest Swiss bank I ever dealt with was Bank Wegelin of St Gallen, founded in 1746. Yet after the legal Gestapo of Washington targeted the bank, Wegelin was forced to liquidate. What a pity, what a world!
The writer is a global equities strategist and fund manager. He can be contacted at: firstname.lastname@example.org
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