Switzerland's largest bank shouldn't forget it needs to pay shareholders returns despite the daunting task of integrating Credit Suisse. The obstacles they face are enormous, a finews.com analysis shows.
It is pride month and large rainbow flags are flying above UBS's headquarters. In all its eagerness to celebrate inclusion and gender diversity, the fact that Switzerland's largest bank is first and foremost a profit-making institution sometimes seems to fall by the wayside. Its ultimate objective is and should be to provide shareholders with the highest-possible returns – sustainably.
But if that was not enough, the bank is deeply absorbed to assimilate its erstwhile competitor, Credit Suisse, at the very unmistakable behest of the Swiss government.
Complex Restructuring
Given that, UBS is running the danger of straying off what has been a very successful path until now. Clear evidence of that is its erratic share price. Over the past three months, it has foundered listlessly between 17 and 19 francs.
Vontobel analyst Andreas Venditti summarized it aptly a few weeks ago when he said: «UBS has gone from being a company that generates high returns for shareholders to a complex restructuring story.»
High Expectations
The big question in the room is whether the last remaining major Swiss bank will ever be in a position to satisfy everyone's high expectations. An analysis by finews.com shows the range of risks and uncertainties it currently faces.
1. Fewer Economies of Scale in Private Banking
(Image: finews.com)
It is already clear that many of the large Credit Suisse private banking client deposits won't be going to UBS. There are several reasons for that. Some clients just don't want to be banked by UBS while others are prepared to leave and go to another bank as they simply feel that the new combined entity will be a wealth management behemoth. The key risk here is that UBS will get fewer economies of scale than it originally expected.
2. Cost Cutting Under A Watchful Public Eye
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The new UBS has to cut costs. But that will not be easy as 2023 is an election year. Certain political circles critical of the banking sector may seek more concessions from the bank than they already have.
If UBS management becomes overly influenced by all that, it runs the risk of becoming bloated and inefficient, which will impair its international competitiveness.
3. Misplaced Risk Emphasis
(Image: Keystone)
As is the norm in banking, there is a mainstream view, even a herd instinct, when it comes to the integration of both institutions. Everyone is paying close attention to investment banking, which is where much of the risk reduction will take place. That is all great and good and UBS head Sergio Ermotti (image above) did that extremely successfully with the old UBS in 2011.
But there are also risks in other areas. UBS will become the clear market leader in global wealth management and it faces a large concentration of risks in that business, something that could end up being very damaging in the long term, at least from a compliance point of view.
In asset management, the issue is entirely different. UBS still runs the danger of not having enough critical mass if it doesn't pursue a substantial takeover.
4. Communicating Bad News
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Inadequate or intransparent communication is an enormous risk, as the example from Credit Suisse last summer shows.
The bank's management said nothing for months and thought it could just pull a rabbit out of a hat at the investor conference at the end of October. In hindsight, we now know how well that all went. In other words, if you do not communicate, someone will do it for you.
UBS refrained from saying anything material until it completed the share transfer and was in a position to announce the delisting of Credit Suisse shares. Now, things are different and it should have a freer hand when it comes to publicly discussing the situation related to employees and the progress of its integration efforts.
If it does not do that soon, it runs the risk of losing employees and wealthy clients.
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