UBS/Cevian: Swiss wealth manager needs to aim sky high

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Scaling mountains requires determination, skill and luck. UBS began its ascent in March, aiming to integrate its acquisition of local rival Credit Suisse. Investors had doubts whether it would succeed. Some of those concerns have dissipated like high clouds.

UBS’s shares have soared 44 per cent since June to their highest level in over 15 years. Yet, its valuation at 1.2 times its tangible book value has not surpassed recent peaks.

Sweden-based Activist Cevian Capital, which has built a €1.2bn exposure, believes UBS may be able to do better. Apparently, UBS lacks ambition on its profitability targets.

That may surprise chair Colm Kelleher and chief executive Sergio Ermotti. Both will feel they have sweated through a route march to get this far unscathed. UBS has promised a return on tangible equity target of some 14 per cent by the end of 2026, well above its cost of equity.

UBS has some advantages lacked by some rivals in wealth management, notably Morgan Stanley. The division produces the bulk of UBS’s revenues. It has a truly international footprint. Over half of its wealth assets under management are outside the Americas.

But the US remains a huge part of the unit’s income and costs. It has the highest cost/income ratio in the bank, at 89 per cent as of September.

Morgan Stanley generates nearly half of its earnings from wealth management, almost entirely in the US. It has targeted a 20 per cent ROTE.

JPMorgan derives a smaller proportion of group income from wealth (and asset) management — under 15 per cent — yet has more US wealth assets under management than UBS, points out Cevian. JPMorgan also promises a higher 17 per cent group ROTE.

In UBS’s defence, under-promising and over-delivering seems a decent plan. Markets think differently. Some European banks, such as Barclays and Deutsche Bank, may have lacked ambition on their ROTE targets. Both have proffered vague “above 10 per cent” goals for the coming years. With costs of equity near 20 per cent, both trade at less than their tangible book values.

Given the lower earnings volatility anticipated from wealth management’s recurring fee income, UBS should be on the right track. It has already halved its revenue weighting from more cyclical investment banking to one-fifth since 2010.

It now must prove that it can squeeze more profits from its US wealth business and hike up its valuation.