UBS analysis: where does the bank that is about to rescue Credit Suisse from a giant problem stand?

The hottest news on the red-hot stock market is out. UBS is in talks to take over Credit Suisse, which is struggling with huge problems. Can UBS afford this acquisition and could it be a good choice for investors?

UBS Group $UBS-0.2% is in talks to take over part or all of Credit Suisse $CS+1.0%, which could involve government support as part of an urgent effort by Swiss and global authorities to restore confidence in the banking system.

Credit Suisse accepted a bailout of more than $50 billion from the Swiss National Bank this week after concerns deepened about its prospects. The measure was not enough to stop Credit Suisse's shares from falling or to stem the loss of bank deposits, prompting the central bank and Switzerland's top financial regulator to hold talks with Credit Suisse's bigger rival, UBS.

I wrote about the current situation at CS a few days ago here: Analysis of the current situation at Credit Suisse: The impoverished bank takes another giant hit after the collapse of SVB. Will it hold up?

According to people familiar with the situation, the banks have been discussing a number of scenarios, including one that would end in a takeover of all or part of Credit Suisse by UBS.

UBS has long been considered part of any government-backed solution for Credit Suisse, whose balance sheet is roughly half the size of UBS's total assets of $1.1 trillion. Any full-scale takeover would bring UBS valuable activities from Credit Suisse, such as looking after clients in Asia and the Middle East, but could also come with less desirable consequences, such as a troubled investment division.

Both banks are considered systemically important in Switzerland and globally, and their merger could be subject to additional oversight. Swiss authorities are expected to reach at least a rough agreement before the market opens on Monday.

Of course, nothing is certain yet. It may not result in a transaction between Credit Suisse and UBS at all. They are the two largest banks by assets in Switzerland, serving savers and businesses there and wealthy customers around the world. Moreover, UBS might not be the only player. Other financial institutions are examining the situation to see if they could buy parts of Credit Suisse or support bids, people familiar with the efforts said, according to foreign websites.

Using UBS to rescue Credit Suisse marks a turnaround from nearly 15 years ago, when Switzerland bailed out UBS after it was stuck with billions in toxic assets in its U.S. operations. Credit Suisse refused state aid then and emerged from the crisis in better shape.

But now for the essentials. Where does the bank that could save CS stand?

A basic overview

UBS is an international banking and finance company based in Zurich, Switzerland. It is one of the largest banks in the world and offers a wide range of wealth management, investment banking and asset management services.

UBS was founded in 1862 as Union Bank of Switzerland and later merged with Bank of Switzerland. The company has branches in more than 50 countries and employs more than 68,000 people. UBS is known for its wealth management services, especially for high net worth and ultra high net worth clients. The bank offers investment management, financial advisory and tax planning services. UBS also provides investment banking and asset management services for institutional investors. In recent years, UBS has focused on restructuring and cost cutting to remain competitive in an era of increasing regulation and pressure on profitability. The company is also focusing on developing digital services to better serve its clients.

In 2020, UBS achieved total revenue of CHF 30.2 billion and net profit of CHF 6.6 billion.

Current data

UBS ended the fourth quarter with a 23% increase in net profit to $1.65 billion, beating analysts' estimates by $1.3 billion and raising its 2022 profit to $7.63 billion from the $7.45 billion recorded in 2021, compared to the average Wall Street consensus forecast of $7.3 billion. In addition to the increase in interest rates, the group also benefited from the outflow of clients from its competitor Credit Suisse, which experienced a very complicated 2022 due to numerous scandals... and the threat of bankruptcy.

In the Q&A, UBS CEO Ralph Hamers explicitly stated that "clients came to us for advice and stability". However, market uncertainty has increased pressure on the investment banking and asset management divisions, whose revenues are down 24% and 31% respectively, despite good net inflows($60bn in global wealth management and $25bn in asset management). To fully offset this negative trend, interest rate momentum is helping UBS's net interest margin business. In the fourth quarter, revenues declined from $8.70 billion in 2021 to $8.02 billion in 2022, while for the full year, revenues declined from $35.39 billion in 2021 to $34.56 billion by 2022. On a percentage basis, revenues declined at a lower rate than operating expenses -2% versus -4%.

The bank confirmed plans to repurchase more than USD5bn worth of shares in 2023, beating consensus expectations of USD4.7bn after buying back USD5.6bn worth of shares in 2022. In addition, UBS proposed a dividend per share of USD 0.55 for 2022, up 10% from 2021 and in line with consensus and guidance already communicated to the market, and reaffirmed its commitment to a progressive dividend policy.

UBS's results are broadly positive. But more importantly, looking ahead, the Swiss lender said Q1 2023 earnings will be "positively impacted" by increased customer activity and interest rates. UBS has a strong franchise in China and this will be a plus point. Analysts expect a total return including dividends and buybacks of 9-10% to reach 22.5%. The CET1 ratio is 14.2% (-20 bps on a quarterly basis). Thus, it seems that UBS should be in good shape. Buying CS will be a big step, but with the government's help, it should be manageable. I guess we'll know more on Monday.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.