UBS – Swiss banking brand sparks growth and earnings

The actual earnings report of UBS tomorrow could very well be a non-event. However, this is an interesting time to scrutinise the future for Swiss investment banks. Last week Credit Suisse posted a net earnings drop of 95 percent y-on-y; net profit came in at CHF 44m. This is actually above analysts’ expectations and sent relative good signals to the market with respect to the rest of 2012. As we have pointed out before, owning shares in investment banks during the last 10 years has meant pretty much a lost decade, chart 1.

UBS and Credit Suisse are two of the giants in the international investment banking industry, battling furiously for market share. Trading income (the old bread and butter income for both banks) is expected to remain at current levels, if not dropping due to the low yield environment and lower client activity, as is the case for their international peers, chart 2.

Another negative factor is the strict capital requirements set by the Swiss banking authority, which basically means that it will be more expensive for both Credit Suisse and UBS to conduct business since their trading activities will tie up more capital, chart 3.

Risk Weighted Assets (RWA) in 2011, according to Basel 2.5, amounted to CHF 241bn compared to CHF 198.5bn which is the case under Basel 2 - representing a 21.4  percent increase. Combining the new higher capital requirements, according to some observers the Core Tier 1 level required for Swiss banks will be at 15 percent; UBS has to carry a substantially higher amount of capital, thus affecting its ROE potential going forward.

Does the lack of upside mean the end of growth prospects for Swiss investment banks?
In this seemingly impossible investment banking environment, the current business mix of UBS and Credit Suisse hides a great opportunity, even if the western economies continue on their negative development path.  

Swiss banking brand sends investment banks back to their wealth management roots
Traditional wealth management is a slow growing and stable operation (chart 2 again) yet very profitable if executed with excellence. Both UBS and Credit Suisse are masters at this. This expertise combined with the strong Swiss banking brand (yes, this is not going away anytime soon) constitutes great growth potential going forward. Looking at new-rich people in any region of the world, having their own Swiss banker is sign of real wealth.

Both banks are already well on their way to making their operations less complex, since complexity can really cost a lot. The answer is further focus on their global wealth management businesses where their competitive advantage is very strong. First quarter earnings estimates for UBS should therefore be seen from the perspective of greater potential in the year ahead in business segments that will transform Swiss investment banks into stable earnings generators, hopefully for years to come.