UBS Shares: Back to Square One?

UBS' stock is hovering at 10 Swiss francs – nearly the level it began at when CEO Sergio Ermotti began restructuring the Swiss giant. What does this mean for UBS?

Thirty-four centimes ($0.35) – that's how close UBS' stock came to crashing through the 10-Swiss franc mark this week. Given the tense mood on financial markets, Switzerland's biggest bank may well hit or even breach the psychologically important 10-franc level.

What is uncomfortable for investors is excruciating for CEO Sergio Ermotti, who in October made a point of buying up 13.1 million francs of the bank's stock on his own dime. His highly symbolic investment has shed one-fifth of its value since then. The last time UBS' shares hit 10 francs was 2012 – but the stock was rising at the time.

Post-Crisis Template

Then, Ermotti had set out to solve the crisis-saddled bank's problems and to refurbish it into the world's largest wealth manager (it is). Under Ermotti, UBS' shares rose to as much as 22 francs. The current threat of 10 francs literally represents a return to square one for the CEO and Chairman Axel Weber.

«If UBS hits that level, the market is genuinely trying the tell us something,» Zurich-based Helvetische Bank analyst Stephan Vollert told finews.com. In fact, UBS was and is the shining example of how to shift the diversified bank into the more lucrative, steady, and predictable wealth management business following the financial crisis.

At Credit Suisse, CEO Tidjane Thiam copied vast elements of Ermotti's and Weber's strategy when he arrived in 2015 and embarked on a three-year overhaul. Deutsche Bank is currently attempting a similar feat, in much more dramatic circumstances.

Foundering Wealth Arm

Not for nothing: UBS' business model promises some cover from a turbulent sector. Wealthy assets command far less regulatory capital than more costly – in capital terms – capital market activities. They also provide a welcome recurring flow of revenue.

But at UBS, the strategy has foundered recently, as finews.com reported. The unit's assets dropped to $2.41 trillion, from $2.43 trillion sequentially. Taken together with indifference by the wealthy in investing, the unit's pretax profit edged 2 percent lower to $1.78 billion.

Series of Headwinds

The wealth unit's problems are more worrisome for UBS investors than previous headwinds. A cooling global economy, prospects of rate cuts from major central banks, as well as increasing costs to innovate and comply with regulation have taken the shine off the erstwhile model for success.

UBS also has a few specific problems, including a high-stakes French criminal retrial and an open regulatory snafu in the U.S. which harks to the financial crisis of 2008/09. But what exactly is plaguing UBS' stock remains unclear: the Swiss lender's premium valuation vs its main rivals has dissipated to just 5 percent on expected price-to-book value in 2021, according to Helvetische Bank's analysts.

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