Credit Suisse Integration And AI Will Improve Efficiency

Key Takeaways

• Integration of Credit Suisse is expected to enhance efficiency and profitability, boosting net margins and earnings.
  
• Robust inflows in Wealth and Asset Management signal future revenue growth, with strategic technology optimizations improving profitability.
  
• Economic uncertainty, integration challenges with Credit Suisse, regulatory changes, and leverage constraints pose significant risks to UBS's future growth and investor confidence.

Catalysts

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

• UBS is making substantial progress in integrating Credit Suisse, which is expected to lead to cost reductions and efficiency gains, potentially boosting net margins and earnings.
  
• Net new inflows in Global Wealth Management and Asset Management are robust, indicating future revenue growth opportunities from increased assets under management.
  
• UBS is continuing to execute on a capital-light strategy in its Investment Bank, enhancing profitability and market share, likely to positively impact earnings.
  
• The development and adoption of generative AI tools are poised to improve productivity and deliver tailored client solutions, supporting revenue growth and potentially improving net margins.
  
• UBS aims to achieve significant cost savings through technology and infrastructure optimizations, targeting $13 billion in gross cost saves by 2026, enhancing net margins and overall profitability.

UBS Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UBS Group's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 22.9% in 3 years time.
• Analysts expect earnings to reach $11.8 billion (and earnings per share of $4.24) by about May 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 $10.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the GB Capital Markets industry at 14.4x.
• 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

• Increased tariffs on trading partners by the U.S. administration have led to uncertainty and market volatility, potentially impacting investor sentiment and causing delays in strategy, capital allocation, and investment decisions, which can affect future revenue growth.
  
• The economic path forward is unpredictable, and the prospect of higher tariffs on global trade presents a material risk to global growth and inflation, potentially impacting UBS’s future earnings due to fluctuating market conditions.
  
• Slower than expected progress in the integration of Credit Suisse, especially in achieving pre-acquisition levels of profitability, could affect operational efficiencies and net margins if integration costs and challenges persist.
  
• Regulatory changes, particularly any material and immediate amendments to capital regimes, could impact UBS’s capital strength and capital return objectives, which in turn could affect investor confidence and share performance.
  
• UBS’s leverage appears more constrained compared to risk-weighted assets, which suggests potential limitations in operational flexibility and future risk-taking capacity, potentially impacting long-term earnings growth.

Valuation

• The analysts have a consensus price target of CHF29.669 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 CHF37.0, 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 $51.7 billion, earnings will come to $11.8 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of CHF24.89, the analyst price target of CHF29.67 is 16.1% higher.
  
• 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.