UBS (NYSE:UBS) is the last remaining behemoth in Swiss banking. It captured attention when it acquired its major competitor, Credit Suisse (CS), for $3 billion, dispelling fears of CS’s impending demise. If you missed the news at the time, several SA articles, including those penned by IP Banking Research, Daniel Jones, and Cavenagh Research, provided invaluable insights.

After witnessing a surge to nearly $30 per share, I’ve pondered on UBS’s further potential. Since the acquisition, the majority of SA analysts have rated UBS a Hold, and my assessment mirrors this sentiment. But what sets this rating apart? My intention is to delve deeply into UBS’s operations, particularly how it stacks up against its peers in value. My focus won’t revolve around the latest quarterly earnings, but on UBS’s future profit potential and its implications for existing shareholders. I will establish a comparative analysis between UBS and its peers to validate why it isn’t valued in line with the most esteemed banks in terms of Price to Book Ratio (P/B), despite a robust Return on Equity (ROE). Subsequently, I will evaluate the earnings potential of each UBS segment and compare it with management’s expectations. The ultimate goal is to outline the necessary conditions for UBS to warrant a reevaluation that will benefit investors. Currently, I believe UBS is a Hold with promising opportunities that merit attention.

Note that all figures are in USD, unless specified otherwise.

Assessing UBS’s Position Among European Banks

UBS is often categorized as just another European bank operating in a region that has experienced sluggish growth since the Great Financial Crisis (GFC) in 2008. To appraise if this label is accurate, a comparison of UBS’s performance against European and American banks based on ROE and P/B seems fitting. In my view, these two metrics are pivotal for appraising a bank. Book Value serves as a precursor for expanding assets (i.e. loans) and its growth is a strong indicator of future earnings. Meanwhile, ROE illuminates how effectively the bank allocates its retained capital (Book Value). Firstly, let’s juxtapose UBS against its European peers in terms of these metrics.

What is evident from the graph below is that before the GFC, European banks held a market valuation of over 1.0 P/B, with the average of the six selected banks likely hovering around 2.0. A P/B above 1.0 denotes a bullish sentiment from the market, signifying an expectation that the bank will continue augmenting its Book Value. Following the GFC, all European banks underwent significant valuation adjustments, resulting in their P/B dropping below 1.0, with sporadic exceptions such as UBS and HSBC (HSBC). A P/B below 1.0 is interpreted as bearish, indicating skepticism from the market regarding the banks’ ability to generate sufficient cash to substantially boost their equity and provide dividends to investors.

UBS’s performance is intriguing: its P/B declined post the Credit Suisse acquisition, yet it has recently reclaimed lost ground. The market was initially slow in acknowledging the acquisition, despite the increase in Book Value, and the stock has now surged to around $30, once again surpassing the 1.0 mark.

A review of the ROE for the same period highlights that the P/B decline among European banks to below 1.0 was justified. Unfortunately, the graph from 2005 to 2023 had to be split in two due to substantial losses during the GFC distorting the ROE for UBS and Deutsche Bank (DB). However, it is evident that between 2005 and 2007, these banks enjoyed ROEs ranging from 15% to 20%, whereas post-2010, their ROE has largely stabilized at 10% or less.

However, UBS emerges as the leader in P/B and ROE. Thus, within the realm of European banks, UBS could be deemed the frontrunner. This raises an intriguing question: if it leads the pack of European banks, how does it measure up against American banks? The subsequent graph illustrates the P/B ratio for UBS and selected American banks. UBS trades on par with Goldman Sachs (GS), surpassing major retail banks such as Bank of America (BAC) and Citi (C), but lags behind the top contenders, JPMorgan (JPM) and Morgan Stanley (MS).

Incorporating the ROE graph clearly indicates that UBS competes favorably with American banks, securing the second position with 11.27%, trailing only behind JPM’s 14.27%. Herein lies the crux: if UBS outstrips Morgan Stanley in ROE, why doesn’t it command a P/B of 1.59, akin to MS? Granted, Morgan Stanley operates differently in the realm of Retail Banking, has made substantial strides since 2010, and has prioritized wealth management more than UBS, but aren’t both entities treading a similar path?