UBS faces a long wait for M&A share-price boost

LONDON, Nov 7 (Reuters Breakingviews) – Sergio Ermotti is racking up M&A wins. But investors in his bank UBS (UBSG.S) still seem relatively cool on his Credit Suisse acquisition. Lingering legal and integration risks suggest it might be a while before the deal’s fruits translate into a higher valuation.
UBS’s third-quarter results on Tuesday show that the emergency rescue, struck in late March at the behest of Swiss authorities, is largely working. Ermotti has reversed the client exodus that ultimately sank Credit Suisse. UBS won almost $22 billion of new client money in its wealth business between June 30 and Sept. 30, which included a $3 billion contribution from the private-banking unit of its old rival.
Costs, meanwhile, are down. Ermotti reckons he has already initiated measures that will save $3 billion a year – almost one-third of the total expense reductions he is aiming for. The combined workforce is about 13,000 smaller than it was at the end of 2022. That should allow shareholders to shrug off a $2 billion restructuring charge in the third quarter, which pushed UBS into the red.
Finally, Ermotti is shedding unwanted exposures that he inherited from Credit Suisse. Risk-weighted assets in the “non-core and legacy” unit fell by $6 billion or 7% over the most recent three-month period. That freed up space on UBS’s balance sheet, helping its common equity Tier 1 capital ratio remain steady even though the bank’s net loss burned through some of its capital.
The question is when investors will acknowledge the good news. After a 3% rise on Tuesday, UBS’s shares are roughly in line with analysts’ expectations for its tangible book per share in 12 months’ time. At the beginning of the year, the bank traded at a premium. The valuation slide is odd since Ermotti hopes to cut $10 billion of costs from the Credit Suisse combination, which should make the bank more profitable. Analysts expect a juicy 14% return on tangible equity in 2026, Visible Alpha data shows.
Yet there’s much to do before investors give UBS credit for that rosier future. First, they’ll have to believe that Ermotti has put to bed any lingering legal and regulatory risks. Bloomberg reported in September that the U.S. Department of Justice had stepped up a probe into Credit Suisse and UBS over suspected Russian compliance failures. UBS said it was not aware of any investigation.
Meanwhile, there’s always the risk that combining the two groups’ back-offices will be harder or costlier than expected. Many of the savings so far have come from cutting staff, which is easier than integrating IT systems. Ermotti may have to wait a little longer for his bold deal to pay off.
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CONTEXT NEWS
UBS on Nov. 7 said it generated $11.7 billion of revenue in the third quarter of 2023. Analysts on average expected $11.6 billion, according to consensus data gathered by Visible Alpha.
The group also booked a $2 billion expense related to the cost of integrating Credit Suisse, which it bought earlier this year.
UBS’s global wealth business attracted $22 billion of new client money, including a $3 billion contribution from the old Credit Suisse private bank.
Shares in UBS rose by 3% to 22.54 Swiss francs as of 0956 GMT on Nov. 7.
Editing by Neil Unmack and Streisand Neto
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