UBS: Twisting in the Wind

After the takeover of Credit Suisse following its near collapse in 2023, historic fellow Swiss bank UBS now possesses assets that are 2.5 times¹ that of its homeland Switzerland’s Gross Domestic Product (GDP). Given its new size and increased access to clients through Credit Suisse’s network, it’s entirely logical to assume that this will prove to be a boost to the company’s stock.

Shortly after the takeover was approved by regulators and announced on the 19th of March 2023, the company’s stock steadily extended gains over both the meandering Nasdaq Financial-100 index (IXF) as well as the broad market S&P 500. Since January of last year till the present, the company has accrued substantial outperformance relative to both indices.

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However, the bank also inherited Credit Suisse’s liabilities as well. As of its last released quarterly update (dated as of end of September 2023), the company’s total revenues for the year are nearly matched by the goodwill impairment from the acquisition.

Source: UBS Financial Statements

While revenues did see a 12% growth in year-on-year (YoY) terms, operating expenses and personnel count witnessed a 45% and 61% growth respectively. In terms of tangible book value of the stock, however, it has witnessed a nearly 50% growth after the acquisition. However, to stave off continuing high costs, it has its work cut out. With regard to risky assets, UBS has been hard at work with some decidedly uncertain outcomes. A plan to liquidate its $250 million distressed-debt business failed last year². The bank is now attempting to sell off these assets individually.

Personnel count is a key concern for investment banks: good talent traditionally is hard to find, almost never cheap and accounts for a massive chunk of expenses. However, given that both UBS and Credit Suisse often competed in the same markets, there are bound to be post-acquisition redundancies. It’s looking to terminate thousands of roles inherited as a result of the acquisition, from the managing director level down³. The layoffs would be driven by cost-cutting considerations as opposed to on the basis of performance. Meanwhile, it’s struggling to offload the investment banking franchise it inherited from Credit Suisse in China, given geopolitical risks and a tough growth outlook forecasted in China’s economy. UBS’ offloading effort (find a buyer) is likely going to be complicated by the fact that nearly all prominent banks are cutting personnel in China and engaged in cost-cutting exercises around the world.

One of the reasons why financial services stocks have traditionally been favoured when recessionary outlook is grim is because high rates tend to translate to higher revenues and increased demand for fixed-income products – a forte for investment banks. Another factor that favours banks is that they have traditionally never been shy about engaging in resolute cost-cutting programs. In effect, they tend to attain cost efficiencies quite rapidly, thus creating substantial tailwinds for investor preference.

The headwind for UBS, however, has been that its explosive capture of market share via the collapse of Credit Suisse has come with costs it’s currently struggling to rationalize. Until the publication of its fourth quarter 2023 results on the 6th of February, the stock can be expected to be volatile. For professional investors, there’s ample potential to consider rapid tactical trading opportunities via UBS3 – which provides a daily-rebalanced 3X exposure to the upside of the stock – or UB3S, which does the same on the downside. Over the course of the next week or so, a combination of these two ETPs might prove to have some interesting payoff potential.

Footnotes:

“After Credit Suisse, what next for UBS, Switzerland, and the Swiss Financial Centre?”, 6 December 2023, International Institute for Management Development (IMD), Lausanne
“UBS to Sell Credit Suisse Distressed Debt Assets Individually”, 18 January 2024, Bloomberg News
“UBS rolls out fresh layoffs as Credit Suisse integration continues”, 18 January 2024, Financial News London

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