UBS Group AG

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

UBS Group AG is a global financial services firm, primarily operating in wealth management, asset management, investment banking, and global banking.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Let’s start by analyzing the nature of their businesses and its moat using the insights from the provided documents.

Business Overview

UBS operates across four core divisions:

Global Wealth Management (GWM): Provides wealth management solutions to high-net-worth and ultra-high-net-worth individuals. It includes financial advisory, discretionary and customized portfolio management, wealth planning, and succession planning services.
Asset Management (AM): Provides investment solutions, including equities, fixed income, hedge funds, and private markets, for institutional and private clients through various investment vehicles.
Investment Bank (IB): Offers a range of services including investment banking, global markets (sales and trading), and advisory. It provides support in capital markets (issuance) and trading of securities.
Personal & Corporate Banking (P&CB): This includes retail and corporate banking services to clients in Switzerland, along with commercial banking services to other companies across the world.

Moat Analysis: 2 / 5

While UBS is a leading player in financial services, it doesn’t possess a wide economic moat because of challenges faced in each of its core businesses.

Intangible Assets: The strength of UBS’s brand name in wealth management does offer some degree of moat, as it provides a certain level of prestige and trust that some customers are willing to pay a premium for. However, it is not strong enough to protect itself from the competition entirely. They have to compete with companies like Goldman Sachs, Morgan Stanley and others with well-known brands. Furthermore, a significant amount of capital is needed to maintain the brand through marketing and building relationships with high-profile clients. The brand isn’t particularly helpful to their other businesses like investment banking, as those clients are less concerned with brand. Rating: 2/5

Switching Costs: While wealth management clients tend to be “sticky” because of the relationship aspect of the business, these relationships are not so difficult to replicate for a more appealing offering with better fees and returns. High-net-worth individuals and family offices often utilize multiple firms for managing their wealth, meaning that an advisor can be easily replaced by another. The switching costs are particularly low in investment banking because these companies need to always go for better pricing. Rating: 1/5

Network Effect: The network effect is a minor factor for UBS. Though having many clients will allow some clients to access more research and other benefits. It is not as impactful as with companies that have a platform business like credit card companies. A bank is not worth more just because it has more clients. Rating: 2/5

Cost Advantage: UBS doesn’t have a significant cost advantage relative to its peers. Its business is very employee-intensive, and its operations are complicated and require large capital outlays. Rating: 1/5

Overall Moat Rating: 2/5 The presence of a strong brand in wealth management provides a small moat. It is counteracted by the high costs to maintain this moat and the lack of barriers in its other business segments, leading to a narrow moat.

Risks to the Moat and Business Resilience

There are significant risks to UBS’s competitive positioning which might affect the returns in the future.

Technological Disruption: Fintech companies have been disrupting segments of the financial services industry, such as retail banking and wealth management. Some of these companies are offering cheaper and more convenient alternative services. Some technology firms are providing low-cost investment offerings that can cannibalize traditional business.
Economic Cycles: The banking industry is highly sensitive to economic cycles. Periods of recession or economic distress can greatly reduce client activity as well as increase loan losses. These cycles can significantly erode profits in both investment banking and lending divisions.
Regulatory Risks: The financial sector is under heavy regulations that vary between countries, which can impact the operations and profitability of a company like UBS. The compliance costs can also be high.
Operational Risks: Given the breadth and scale of the financial institutions they have to maintain excellent operations in order to not be involved with big losses.
Reputational Risks: After the Swiss government had to step in to save Credit Suisse, the banking sector became very unpopular. This has caused higher regulatory requirements. Any issues with the bank’s ethics could greatly impact the willingness of high-profile clients to stay with the bank.
Competition: The financial services industry is highly competitive. Many different banks are offering similar services and high net worth individuals and large corporations may pick a different one. Despite all of the mentioned risks, UBS has a degree of business resilience due to its long track record in the financial world, and its large client base.

Detailed Business Explanation

Here’s a detailed look at UBS’s operations, industry trends, financials, and other relevant details.

Revenue Distribution:

Global Wealth Management: Is the largest driver of revenue, usually making 40-50% of the overall revenue. This segment makes a significant portion of the revenue by charging advisory fees.
Asset Management: Follows GWM in size, usually making around 20-25% of the total revenue. This division makes revenues by charging a percentage of the overall capital that they manage.
Investment Bank: Volatile business model with widely fluctuating revenues. It is the third largest division by revenue, at around 20-25%.
Personal & Corporate Banking: This division makes the least revenue, but is a vital component of the business. It constitutes about 10-15% of the overall revenues and provides a stable income to the business.

Industry Trends:

The global wealth management industry is expanding, propelled by increasing wealth in developing nations.
Technological innovations are creating opportunities but are also presenting more competition for wealth managers.
The asset management industry has grown rapidly over the last few decades and has benefited from increasing investor sophistication.
The increase of global volatility and geopolitical issues have made investors crave for safety.
Demand for complex products has increased as the number of high-net-worth individuals and family offices has increased, which often results in greater fees for investment banks.
Consolidation has begun in many segments of the financial industry.

Margins:

GWM and AM are generally higher-margin business units than IB and P&CB, due to their recurring revenue model and the relatively stable nature of their operations.
IB is usually the most profitable division if it is doing well but can also quickly become unprofitable during market downturns.

Competitive Landscape:

UBS competes with other major global investment banks, such as Goldman Sachs, Morgan Stanley, and J.P. Morgan, in all of its divisions.
It also competes with specialized players, like BlackRock and Vanguard in asset management.
It faces competition from smaller regional banks in its retail banking segment.

What Makes UBS Different?

UBS’s brand has strong recognition among high-net-worth individuals and family offices.
It is recognized as a “Swiss” brand which signifies stability, security and trust.
The global reach of the bank allows it to provide services to large multinational companies.
Its diverse set of business lines allows the company to capture multiple aspects of the financial industry.

Financials In Depth

Let’s take a look at key financial information using the latest quarterly information, 2024 Q3 results.

Highlights from 2024 Q3:

Profit: They had a pre-tax profit of USD 1.4 billion driven by strong performance from the wealth management division.
Net Income: They earned a net profit of USD 1.4 billion. The third-quarter results also saw a return to organic growth.
Assets: Invested assets across the group increased by 12% year on year to USD 1.2 trillion.
Capital: They maintained a strong capital position with a CET1 capital ratio of 14.4%, reflecting efforts to increase their capital levels.
Revenue: A 4th year-on-year increase in underlying revenues.
Strategy: Continued progress on integration and improving operational efficiency.

Income Statement Analysis:

Looking at historical trends, it appears that operating expenses have been increasing by a higher percentage than net revenues. This has lowered the efficiency of the company by a bit, and if the situation doesn’t improve, then it may hurt the profitability.
One of their main sources of revenue is fees on asset management and wealth management, which are recurring and do not depend heavily on external factors. This provides some stability to their operations.
Net interest income, a key component of earnings from their lending operations, has been on a steady uptrend in the past few years. However, due to high inflation in the economy, interest expenses have increased at an even higher rate, thereby decreasing net interest margins.
From the earnings call and commentary, it seems like they are putting a lot of effort into integrating Credit Suisse into the broader operations and have planned to significantly reduce operational costs by 2026.
The management is also guiding for low to mid single-digit growth. The future revenue growth appears relatively modest compared to their past.
They mentioned in their Q3 report that they have accelerated the transitional capital depletion for the Credit Suisse merger. So it seems like they are planning to complete this acquisition as soon as possible and are putting up the capital to do so.

Balance Sheet Analysis:

UBS manages a very large balance sheet with a huge amount of assets. But a lot of the assets are not real assets but instead loans that they have provided to various institutions, which brings some risk.
They have a fair bit of goodwill on their balance sheet (30 million +), this can affect the profitability if they have to do write-downs in the future.
They are also subject to a large amount of leverage. These leverage ratios appear pretty stable, but are still something to keep in mind.
Their net debt to equity is not too bad, and is in the low single digits.
They have also shown commitment to increase their CET1 ratio.
Even after the merger, UBS maintains a very high-quality balance sheet, so I have given a positive assessment.

Capital and Liquidity:

Capital planning is a significant part of their core operational strategy, which helps in their management of risk.
The regulators require a certain amount of capital reserves to be in their balance sheet, which can help protect against unexpected financial losses.
The new structure will have lower levels of leverage, which reduces the risk for shareholders.
They are targeting a common equity tier one (CET1) capital ratio of around 14%, and they are almost there. This would make the bank much more stable.

Understandability: 4 / 5

The business of UBS is fairly complex, as it operates in four distinct segments. However, the operations are reasonably easy to understand, and most people are aware of what financial firms do. Furthermore, most of their activities are tied to publicly available data, such as interest rates and inflation. Rating: 4/5

Balance Sheet Health: 4 / 5

While there are risks inherent with any financial institution, UBS’s balance sheet is quite stable and healthy. As highlighted by the management, they are in the process of increasing their capital levels, which will make the bank even safer in the future. Rating: 4/5

In conclusion, UBS, as a strong player in the financial services space, has a narrow economic moat, with some identifiable risks. However, they are constantly evolving and trying to position themselves in such a way that can maximize their long-term potential.