Credit Suisse Integration And Technology Investments To Boost Efficiency By 2026

Key Takeaways

• Strategic focus on digital transformation and technology aims to enhance client engagement and boost future earnings through improved operating leverage.
  
• Initiatives in Global Wealth Management and cost-saving measures are set to positively impact revenue and efficiency, enhancing earnings per share.
  
• Restructuring costs and operational challenges from Credit Suisse integration, interest rate headwinds, and regulatory changes could hinder UBS's profitability and growth prospects.

Catalysts

Provides financial advice and solutions to private, institutional, and corporate clients worldwide.

• UBS is on track with its Credit Suisse integration plans and expects to substantially complete this by 2026, which should enhance scale, drive cost synergies, and potentially increase net margins.
  
• The company is focusing on digital transformation and technology investments, including generative AI and cloud infrastructure, expected to improve operating leverage and client engagement, potentially boosting future earnings.
  
• UBS is driving growth in its Global Wealth Management division with plans to increase market share in key regions such as APAC and the Americas, likely to impact revenue positively through greater asset-gathering capabilities.
  
• The company is optimizing its balance sheet and legacy asset runoff, which should free up capital for more profitable ventures and share buybacks, enhancing earnings per share.
  
• UBS is implementing cost-saving measures to achieve around $13 billion in gross cost reductions by 2026, expected to improve operational efficiency and net margins.

UBS Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UBS Group's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $11.6 billion (and earnings per share of $4.08) by about February 2028, up from $5.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $13.3 billion in earnings, and the most bearish expecting $9.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, down from 21.1x today. This future PE is lower than the current PE for the GB Capital Markets industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

UBS Group Future Earnings Per Share Growth

Risks

• The integration of Credit Suisse brings significant restructuring costs and operational challenges, which could weigh down UBS's profitability in the near term as the execution is not a straight line, potentially impacting net margins.
  
• Given the current and expected interest rate environments in key currencies such as Swiss francs and euros, UBS faces headwinds in net interest income (NII), which could negatively affect revenue.
  
• The ongoing restructuring efforts and migration of client accounts may result in increased expenses and execution risk, potentially affecting earnings and financial stability.
  
• Potential changes in the Swiss capital regulatory framework could lead to higher capital requirements, which would dilute returns and constrain UBS's ability to use capital for growth or shareholder returns.
  
• Challenges in the U.S. wealth management business, such as competitive pressures and the need for operational improvements, could limit margin improvements and growth unless effectively executed, impacting UBS's overall revenue and profit targets.

Valuation

• The analysts have a consensus price target of CHF31.759 for UBS Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF44.5, and the most bearish reporting a price target of just CHF21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $50.4 billion, earnings will come to $11.6 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of CHF30.32, the analyst price target of CHF31.76 is 4.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.