By Jon Sindreu
Could UBS come to look — and be valued — like Morgan Stanley? Yes, but the aftermath of a megadeal isn’t the ideal time to get a celebrity makeover.
The Swiss bank’s annual accounts, published Tuesday, show the challenges inherent in its deal last year to acquire Credit Suisse. UBS’s assets increased by 56% in 2023 compared with 2022, but its revenues were only 18% higher. A net loss of $279 million for the final quarter mostly reflected a $1.8 billion expense from the continuing integration of its unprofitable former rival.
After an initial period of doubt, investors came to embrace the transaction. UBS shares have delivered a 36% total return since it closed in June, compared with roughly 5% for the Stoxx Europe 600 index.
Now that the $29 billion one-off windfall from a discount deal price has already been recorded, though, overcoming skepticism might prove harder. Two-thirds of the integration costs are still due. They will come in the form of mammoth quarterly bills between now and 2026.
Investors need a longer-term story to get excited. Luckily, UBS has one: In December, Cevian Capital — Europe’s largest dedicated activist investor — took a $1.3 billion stake in the company, highlighting how the Swiss bank trades at half the valuation of Morgan Stanley.
The U.S. bank has captured the market’s imagination by setting a companywide goal of 20% return on tangible equity. Under Chief Executive James Gorman, who took over in 2010 and stepped down from the role at the end of last year, it went from an embattled investment bank to a wealth-management powerhouse, recently helped by a string of acquisitions including asset manager Eaton Vance and online broker E*Trade.
Servicing the ultrarich is a desirable business for financial firms in the post-2008 era. Compared with investment banking, it generates higher returns while requiring less capital, and usually locks in clients for years.
Cevian makes the compelling case that UBS already has this prized business mix in place: 52% of its revenues in 2023 came from wealth management, compared with 49% for Morgan Stanley. One difference is that the U.S. bank extracted a 33% return on tangible equity from wealth management in 2023, whereas UBS said Tuesday that it only got a 16% return. But a lot of this has to do with the Credit Suisse integration, as well as a one-off hit from UBS’s stake in financial-services firm SIX Group. In 2022, the number was 25%.
Yet Morgan Stanley’s high valuation isn’t just predicated on it making fat margins from existing wealthy clients. It also prices in a lot of growth. Wealth management needs scale to truly unlock its earnings potential.
Indeed, the U.S. bank has targeted client assets of $10 trillion between its wealth and asset management arms, from $6.6 trillion at the end of 2023. Analysts expect it to come close by the end of 2027, data by Visible Alpha shows. Meanwhile, they predict only modest growth in UBS’s client assets.
The Swiss bank seems to be increasingly aware that it needs to address those low expectations. On top of reiterating their target of a 15% return on equity for 2026, executives on Tuesday added an 18% goal for 2028. They also want to hit $5 trillion in wealth-management assets that year, from $3.9 trillion now.
“We are not just a restructuring story, we will grow again,” UBS CEO Sergio Ermotti told analysts Tuesday.
Trying to shrink the bank while also expanding in the right places is a difficult balancing act. UBS’s intention to increase dividends and buybacks could also come at the expense of required investments. Ermotti wants wealth management to reap $100 billion in net new money this year and the same again in 2025. That could mean battling it out in the U.S., Morgan Stanley’s cutthroat home market. Costs there are higher because financial advisers play a more prominent role.
UBS remains one of the most interesting investment opportunities in European banking. Narrowing the gap with its closest U.S. peer, however, will require a lot of multitasking.
Write to Jon Sindreu at jon.sindreu@wsj.com