UBS can share more M&A savings with investors
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Liam Proud
LONDON, Oct 30 (Reuters Breakingviews) -Sergio Ermotti’s UBSG.S integration of Credit Suisse is clearly going well. The only real question is why so few of the touted cost savings seem to be benefitting UBS’s reported operating expenses. To get investors firmly onside, the CEO will have to get far more of the cuts to drop down to the bottom line.
Third-quarter results on Wednesday showed UBS axing its way through the carcass of its old rival. The so-called non-core and legacy division, effectively the bits of Credit Suisse that Ermotti wants to ditch, now contains just $45 billion of risk-weighted assets, compared with $86 billion last June, which was roughly when UBS completed the state-orchestrated rescue deal. Nor has the bank taken its eye off the ball on growth: the top line, excluding one-offs, grew 9% year-on-year even as the tailwind from high interest rates started to fade.
Ermotti also increased the planned pace of cost cuts. By the end of this year, he reckons the group will have achieved $7.5 billion of the total planned $13 billion in merger savings. That 2024 target stood at $7 billion in August and $6.5 billion in May.
The hitch, however, is that the touted cuts are not translating into a commensurately lower cost base. UBS reckons that its underlying expenses over the past 12 months were $37.4 billion. That compares with a 2022 pre-deal baseline for UBS and Credit Suisse of about $41.6 billion, after adjusting for the effects of currency fluctuations in the intervening years. In other words, actual expenses have gone down by $4.2 billion, roughly.
That figure is just 56% of the headline $7.5 billion in savings that Ermotti is now touting for this year. In other words, just over half of the headline cuts seem to be making their way to the bottom line.
There are good reasons for this. UBS’s core wealth-management business is growing, grabbing about $25 billion of net new assets a quarter. Since much of the associated revenue comes with a cost, such as private bankers’ commissions, that growth naturally pushes up overall costs and offsets some of the M&A savings.
Still, the multibillion-dollar gap between gross and net cost savings makes it harder for investors to assess the true value of Ermotti’s merger prize. The puzzle also arguably helps to explain lingering market scepticism. UBS trades at 1.2 times expected forward tangible book value, which is roughly in line with its pre-deal valuation multiple, even though it should in theory be on the road to becoming a more profitable and higher-returning bank. Ermotti could change that mixed perception by sharing more of the M&A goodies with shareholders.
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CONTEXT NEWS
UBS on Oct. 30 reported $11.7 billion in underlying revenue for the third quarter of 2024, which was 8% higher than the average analysts’ forecasts gathered by Visible Alpha. The Swiss bank’s underlying top line excludes one-off effects like accounting quirks related to its 2023 acquisition of Credit Suisse.
CEO Sergio Ermotti expects to cut $7.5 billion of costs as a result of the deal by the end of 2024 – an increase of $500 million since the second-quarter results.
Shares in UBS were down 1% to 28.19 Swiss francs as of 0953 GMT on Oct. 30.
UBS's valuation round-trip since Credit Suisse deal https://reut.rs/3NMla3a
Editing by Francesco Guerrera and Streisand Neto
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