Swiss Banking Titan May Get Even Bigger

08/23/2007 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says UBS, the world’s largest money manager, should rebound strongly from a management shake-up and the current market turmoil.

UBS (NYSE: UBS) is the biggest bank in Switzerland and the world’s largest money manager with $2.6 trillion of invested assets. While UBS can trace its roots as far back as the 18th century through various predecessor firms, the modern-day bank took shape through a series of big mergers over the past ten years or so.

The real transformation came in 2000 when UBS bought PaineWebber. The merger gave UBS a major presence in the US and helped lay the framework for a truly global institution.

While there’s no question that UBS has a top-notch global franchise, its recent performance has been hampered by a number of negative developments. Some of these, such as the panic sweeping the credit markets, are affecting the whole financial services industry. Like many big banks, UBS has a mortgage-backed securities business and this will surely take a hit from the subprime meltdown.

Other problems, however, are company-specific. In early July, UBS ousted its chief executive Peter Wuffli in a boardroom coup. Wuffli, who had been at the helm for much of the current decade, was replaced by Marcel Rohner. In May, well before the latest panic attack hit global markets, UBS shuttered one of its in-house hedge funds.

While it’s doubtful that any of this reshuffling will cause much serious damage, it will take some time for Rohner to make his mark and for the new team to turn the ship around. Finance is ultimately a talent-driven business and management shakeups can be a drag on both actual and perceived results.

These recent stumbles, among other factors, have prompted some activist investors to call for UBS to separate its asset management and investment banking activities as a means to boost shareholder value. The wealth management business is extremely profitable—and the income streams are much less volatile than in investment banking. As a result, pure asset management firms generally command much higher valuations than investment banks.

A break-up scenario is hard to envision given UBS’s longstanding commitment to a “one bank” approach. Splitting the firm might make sense on paper, but it’s very hard to see a conservative Swiss institution doing something quite that radical.

But a bit of pressure from activist shareholders is a good thing. It will keep management focused on creating shareholder value and shoring up the struggling investment bank. Over the long haul UBS has an exceptional position in global wealth management and it is expanding its presence in emerging markets where a lot of the world’s new wealth is being created.

Investors can afford to be patient with UBS. At a recent [price below $53], UBS is trading at [around nine times] consensus forecasts for 2008 earnings and 2.4x book value. Return on equity is a robust 29%, and the bank is buying back stock.

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