Has UBS got a problem? Chirantan Barua at Bernstein Research thinks so. In light of last week’s miserable results from the Swiss bank, Barua has reiterated his underperform rating on UBS’s stock, citing the poor performance of the investment bank as part of the problem. Deutsche Bank’s banking analysts were similarly underwhelmed, suggesting there was nothing in UBS’s fourth quarter to alter their opinion that the bank offers little upside.
UBS hasn’t got a hiring freeze and has, ostensibly, ended the cuts in its investment bank. Before joining, though, Barua suggests new hires might want to clarify the following strategy issues:
1. What does UBS plan to do about its shriveled fixed income trading business?
When UBS cut its fixed income trading business to the bone in 2012, it was heralded as a great idea. Now that fixed income trading is making a comeback, it looks a little unfortunate. Are there any plans to build it back up again?
Source: Bernstein Research
2. Is the over-gearing of UBS’s investment banking business to equities seen as a problem?
The flipside to UBS’s fixed income feebleness is its over-reliance on equities trading, especially in Europe. Bernstein says this looks problematic: MiFID II, buy-side consolidation and a move to more passive investing all threaten to erode equities commissions in Europe, and UBS lacks the scale in the U.S. to benefit from Trump tailwinds.
3. Are there plans to hire more senior bankers in the U.S. market?
UBS’s investment banking business had a good fourth quarter, but in light of the Swiss bank’s U.S. weakness, Bernstein questions whether this can last. The bank really needs to increase its market share in M&A and equity capital markets (ECM), and would seem to imply hiring yet more U.S. rainmakers.
4. What of the fines?
Lastly, like Deutsche Bank, UBS has invoked the ire of regulators. Bernstein notes that UBS still faces a fine relating to the sale of residential mortgage backed securities in the financial crisis, along with a potentially large fine in a French tax fraud case. While the bank had a healthy core equity tire one ratio of 13.8% at the end of last year (compared to the 11% regulatory requirement under Basel IV), it’s therefore too early to be totally complacent. How does UBS feel about the looming court cases? And will the fines constrain its ability to put capital to work in fixed income (see one)?
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