UBS's shares remain undervalued compared with peers despite their recent rally. Activist shareholders such as Cevian Capital see significant price potential. But they are just one of many.
The market capitalization of UBS has been a thorn in chairman Colm Kelleher's side for a while now with key competitors on Wall Street, including Morgan Stanley, having far higher price-to-book ratios.
That gap has shrunk since the rally in UBS shares in summer – but it is still there.
Uneven Valuations
Several analysts see the potential for further gains in UBS's share price given the valuation discount against its American rivals. Swedish activist investor, now a major UBS shareholder, is one of them.
Co-founder Lars Förberg indicates that closing the gap with the world's largest wealth manager Morgan Stanley would imply a UBS share price of 50 francs. Right now, they are changing hands at about 25 francs.
A Long Way
The increase in value over the past few months means that UBS is now trading at a price-to-tangible-book ratio of 1.2. Morgan Stanley, meanwhile, has a price-to-tangible-book ratio of 2.2, which means Switzerland's largest bank still has a lot of ground to cover in the race for the highest market cap.
Still, UBS equity is valued far more highly than that of most other bank shares around the world.
A new study by US-based Boston Consulting Group (BCG) shows that around three-quarters of all banks were trading below a price-to-book ratio of 1 in 2022. That is about half the level it was at before the financial crisis in 2008, at least from the perspective of price-to-earnings ratios, with the current level much due to investor restraint, says BCG.
Long-term Scars
The global financial crisis was a turning point for the financial sector. Systemic risks became apparent and the sector required massive government intervention to restore stability. From that viewpoint, it is not altogether surprising that banks suffered a massive hit and that most have since not recovered.
But the main reason for the current pessimism is a significant decline in profitability. According to BCG, the average return on equity since the financial crisis has fallen by more than 450 basis points and many banks are not earning their cost of capital.
A New Era
The experts maintain that it is unlikely that banks will return to the capitalization and profitability levels seen before the financial crisis even if they make significant investments in productivity and radically simplify their business models. Profits will remain under pressure because of heightened capital requirements and increasing competition from other players and sectors, including fintech, BCG says.
Despite that, financial institutions can sustainably increase earnings to pay for their cost of capital and increase valuation levels. The BCG consultants believe that a $7 trillion opportunity awaits the sector if they focus on growth and improving their price-to-book ratios.
But that implies doubling current market valuations over the next five years.
Discarding Legacy Businesses
The study says banks face the challenge of fundamentally rethinking their business models in the pursuit of more promising strategies to serve clients better while increasing their market value.
It is no longer feasible to make this transformation in small steps, building new businesses piece by piece on legacy infrastructure. In fact, it is more likely to impede progress than anything else. Financial institutions have to reevaluate their entire organization and strike a clear strategic path.
The Pace of Modernization
The study also maintains that legacy IT systems hinder a bank's ability to «boldly» modernize while overarching issues such as climate change and macroeconomic trends exert additional pressure on profitability.
Big tech could also make strong forays into their markets with the development of open banking, with a danger that banks would subsequently be reduced to becoming pure service providers.
Help From Governments and Regulators
The current imperative is for banks to develop strategies that strengthen their position and allow them to take advantage of the opportunities resulting from the changes to the global financial ecosystem.
To succeed, the BCG consultants said banks need to enjoy active governmental support while cooperating in close partnership with supervisory authorities.
