In a note published Monday, Barclays European banks analysts Amit Goel, Jun Yang and Krishnendra Dubey cut their price target for UBS by 6%, and suggested the bank may need a strategy overhaul to avoid weak profitability. However, they also noted that no imminent changes were expected.
Justifying their “underweight” position on UBS compared to the neutral industry view, the analysts said that while the market environment may be challenging, competitors focusing on niche products were “generating much higher RoEs (return on equity).”
“Many investors we speak to believe that UBS should also be able to achieve higher returns, and have been frustrated for some time in this regard.”
The note specifically referenced Swiss private bank Julius Baer, which most recently reported underlying pre-tax return on tangible investment (RoTE) of 33% for 2018. UBS is currently targeting RoTE of 12.5% in 2019, although sell-side analysts do not currently expect the group to achieve this.
Along with questions of organization, the note also questions whether more broadly, it would make sense to “break up” the UBS group, and whether the “costs of size are more than outweighing the benefits?”
The analysts acknowledged the common justifications offered for weak profitability, including the global nature of the business and structural costs of spanning different jurisdictions. The fact that the group’s U.S. business has a structurally low operating margin, but is “tax efficient,” was also cited along with the significant amount of capital tied up in the investment bank.
However, the note called into question whether the current business model could optimize returns, and whether the profitability potential of the group could in fact decline further from here.