Financial institutions like UBS or Credit Suisse are suffering from falling interest rates. That depresses stock prices. But there is also an exception.
IIn October last year, Sergio Ermotti acquired one million shares in UBS. The CEO of the largest Swiss bank wanted to show how good and promising he finds the situation and prospects of his house. At the time, the Ticino was paying a little more than CHF 13 per share. He had this signal cost a good 13 million francs, which was roughly equivalent to his total salary in 2018. However, this commitment has not yet paid off. On the contrary: Ermotti’s share package is now only worth CHF 10.3 million. To his horror and that of all the other shareholders, the UBS share price even fell briefly below the CHF 10 mark in mid-August. This has only happened three times in the history of the financial giant from Zurich on an annual basis: in the financial crisis of 2009 and in the difficult finding phase that followed.
“UBS price fall will be dangerous for Ermotti”, headlined the Swiss “Sonntagszeitung” and recalled that prices below 10 francs had already led to a change of guard at the top of the bank in the past. According to current considerations, the 59-year-old Ermotti should not give up the scepter for about two years. This is logical in so far as there has been no internal successor to date. The more the eyes are on Iqbal Khan. The talented young manager, who was in the service of big rival Credit Suisse until the end of June, is negotiating about joining UBS. It should be about a position in the corporate management – with the prospect of later promotion to the top. Since Khan did a very good job in asset management at Credit Suisse, his move to UBS could lead to a price increase there. After all, asset management is UBS’s flagship discipline; here she is the leader in the world.
However, investors shouldn’t expect any miracles from Khan, at least in the short term. Its commitment would not change the poor environment that all banks are currently struggling with. The unexpectedly falling interest rates are pushing revenues and thus also stock exchange prices down.
UBS is particularly affected by the interest rate cuts that have already taken place and are still to be expected, because it is more active in America than other European banks, says Andreas Venditti, bank analyst at Bank Vontobel in Zurich. UBS manages more than $ 1,000 billion in assets overseas. Overall, the bank suffers from the fact that, because of the uncertain prospects on the stock exchange, customers remain passive and hardly make any investments. As a result, the transaction-dependent income is weakening.
There is also a special problem: The Federal Court in Lausanne recently ruled that UBS must provide the French tax authorities with customer and account data from the time before the banking secrecy fell. This, in turn, could have an impact on the ongoing criminal proceedings in France, in which the bank was sentenced in the first instance to a record fine of 4.5 billion euros for aiding and abetting tax evasion. Although the whole thing is to be booked under the heading “Coming to terms with the past”, it nonetheless creates uncertainty among investors due to the uncertain outcome.
Since the beginning of this year, the UBS share has lost a good 15 percent of its value, while the leading Swiss Market Index (SMI) has gained almost 16 percent. Only 74 percent of its book value is currently paid for a share on the stock exchange. Compared to other European universal banks such as Deutscher Bank, Unicredit or BNP Paribas, however, UBS is not in that bad position. Because the bank generates a return on equity that is roughly on par with the cost of capital, such an undervaluation is actually not justified, says analyst Venditti. His target price over the next twelve months is: 15.50 francs.
The Credit Suisse (CS) share price has risen by four percent to CHF 11.20 since the beginning of the year. This reflects the success of the three-year Rosskur, which reduced costs by more than four billion francs. The elimination of high restructuring and financing costs also ensures significantly better results this year. Even so, CS shares are still further from their book value than UBS shares. The main reason for this is that, despite all the progress, Credit Suisse is still generating a poorer return on equity than its major competitor UBS. Venditti believes that the CS share has less potential to catch up. His target price here is: 12.50 francs.
Except for Julius Baer
Julius Baer did quite well. The share price of this asset manager from Zurich has risen by nine percent to 38.20 francs since the beginning of the year. A special effect came into play here, however: In April, Julius Baer slipped out of the leading index due to the addition of Alcon to the SMI. Bear had little weight in the SMI, which is why the exit of index-oriented investors did not leave any major mark on the price. In the mean value index in which Bär was then included, however, the bank was and is a comparatively large number. The demand for bear shares was suddenly correspondingly high among those investors who replicate this index in their portfolios.