UBS shares (NYSE: UBS), the world’s largest wealth manager, has gained around 17%, from around $ 14 at the start of 2021 to around $ 16 currently, edging out the S & P500, which has risen 13% over the course of the same period.
There were two main reasons for this: First, the approval of the $ 1.9 trillion stimulus package in the United States Second, the accelerated vaccination campaign against Covid-19 in the United States and Switzerland. The above two factors reinforce forecasts of a strong economic recovery.
But is that all there is in the story?
Not quite, despite recent gains, says Trefis UBS valuation at around $ 18 per share – 10% above the current market price – depending on a key opportunity and risk factor.
The opportunity we see is an improved trajectory for UBS revenues during the following quarters. UBS’s net income for the year 2020 (income less provisions for credit losses) increased 12% year-on-year to $ 32.4 billion. It was mainly driven by a 27% year-on-year jump in the investment banking division (sales & trading and investment banking activities) followed by growth in wealth management and asset management units. While the rise in investment banking was driven by higher transaction and subscription volumes, wealth management and asset management benefited from the growth in assets under management (AuM), which increased by 14% yoy to $ 3 trillion and 21% yoy to $ 1.1 trillion, respectively. On the other hand, the bank recorded a 2% drop in its net banking income to individuals and businesses due to an accumulation of provisions for credit losses.
The bank missed consensus estimates for revenue and profit in the first quarter of fiscal 2021. While net income increased 10% year-on-year to $ 8.7 billion, the bank suffered a loss of $ 774 million in the quarter due to the failure of the Archegos hedge fund. It recorded a 7% year-over-year decline in its investment banking division, driven by lower sales and trading revenues, partially offset by growth in investment banking. In particular, the wealth management and asset management activities also continued their growth momentum in the first quarter, thanks to the growth in assets under management. In addition, the personal and commercial banking segment grew 15% year-on-year, driven by higher non-interest income and lower provisions for credit losses. That said, we expect sales and trading and investment banking activities to see higher trading and underwriting volumes for some time to come, before normalizing as economic conditions recover. In addition, growth in assets under management is expected to drive growth in wealth and asset management business during the year. Overall, we expect UBS’s revenue to reach around $ 33 billion in fiscal 2021.
The adjusted net margin is expected to decrease in fiscal 2021 from 20.2% to 17.5%, due to higher operating expenses. This should reduce EPS from $ 1.77 to $ 1.59 for the year, which together with the P / E multiple of just above 11x will lead to a valuation of around $ 18.
Finally, how much should the market pay per dollar of UBS profit? Well, to make almost $ 1.59 a year from a bank, you would have to deposit around $ 159 into a savings account today, which is around 100 times your desired earnings. At the current UBS share price of around $ 16, we’re talking about a P / E multiple just above 10x. And we think a figure closer to 11x will be appropriate.
That said, banking is a risky business right now. While growth is likely, a change in current market sentiment can hurt the near-term outlook. What is behind this?
The bank has a portfolio of around $ 146 billion in personal and business bank loans (according to figures from March 2021). It increased its provisions for credit losses in fiscal 2020 to offset the higher risk of default. In particular, provisions have experienced a favorable decline in recent quarters, signaling some improvement in the repayment capacity of its clients’ loans. However, any sudden increase in Covid-19 cases or deterioration in economic conditions can expose UBS to significant defaults. In addition, the deterioration of the economic scenario may adversely affect asset valuation, which has a negative impact on UBS’s wealth and asset management activities. To sum up, we think the UBS stock is somewhat undervalued.
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