This first analysis is from a fellow GLG contributor. See below for my update. UBS' stock price has declined significantly in the past two years - a further sale of yet more stock will put additional pressure on share prices. 2. With core capital at approximately 10% (4% lower than it's comparable peer - Credit Suisse), UBS might be hoping that a market rally will buoy the common stock portion of their core capital more than the less liquid governmental preferred shares. 3.Are they looking to repay for issues relating to their peers (JPMC, MS, AXP repaying) or because there are worse risks if their stock price falls below the Swiss government's break-even point at approximately 12.5 CHF? UBS is considering the repayment of CHF 6bn that the Swiss government loaned through the purchase of Mandatory Convertible Notes (MCNs) maturing in 2011. In light of the recent news that JP Morgan, Morgan Stanley, and American Express intend to repay US government issued TARP funds in the near future, a stock sale by UBS is reportedly under consideration. The Swiss Finance Minister reiterated that any reimbursement should be done so responsibly so as to ensure the health and stability of the bank and eliminate the need for future government intervention. UBS’s Tier 1 capital ratio stands at 10%, about 4% lower than its other Swiss competitor, Credit Suisse. All the banks, including UBS, are chafing under government restrictions. They would all like to regain all decision making responsibilities, including those related to compensation. Government reimbursement is also perceived as a sign of the strength of the bank, which is correlated to the attraction of new talent and retention of the existing. It is interesting to note that the Swiss government did not choose to exercise the MCN notes at the exercise date (Tuesday) which buoyed the stock price slightly. The Swiss government has the option of finding new investors for the MCNs that it currently holds or selling the converted shares. If converted to equity, the Swiss government would hold approximately a 9% stake in the bank. The current convert price of CHF 18.21 would allow them to profit at UBS’s current stock price (CHF 16.08), as the government would be issued a higher number of shares, although capped at a maximum of 330mm. Currently, UBS pays CHF 750mm annually (12.5%) in interest to the government, thus making the price at which the government would break even to be 12.5 francs. Although the stock price has remained above that level recently, the concern over future prospects for UBS linger, especially following its Q1 2009 loss. The UBS Chairman recently noted that the bank “wasn’t out of the woods yet.” So does the Swiss government have a buyer in the wings? Or was not exercizing the shares a political move? If a political decision, how long is the government prepared to stand by? A move to less than 12.5 francs in not impossible ...it is less than 3 standard deviations away from the 260 day mean. Does UBS want to pay back the government today because they might not be able to do so tomorrow? Should the bank continue to lose money, thus making the government’s investment unprofitable, a break-up of UBS franchise is a significant possibility, separating the investment bank from the “core franchise” of wealth management. According to a Euromoney private banking survey, UBS remains the leading wealth management franchise globally. However, we are seeing record numbers of HNW clients change banks. Indeed, it is estimated that more high net and ultra highnet clients have changed banks in the past 18 months than have previously changed banks in the past 18 years! Under normal circumstances. a spinoff of the investment bank would not to expected to happen in the near term. Potential buyers are scarce, despite UBS’s attractive, market-leading position in Equities and Foreign Exchange. The bank is also still dealing with turmoil on the Private Banking side. The fines from its involvement in supposedly encouraging wealthy investors to evade taxes are large - and the reputational damage even greater. However UBS has continued to hire. The number of financial advisers in the Americas increased by 153 people to 8,760. The new advisers have done some good - global client withdrawals slowed to CHF 23.4bn while Wealth Management Americas posted CHF 16.2bn of inflows at the end of Q1 2009. Newly appointed CEO Gruebel remarked that it would take at least 2 years to completely restore client confidence in the franchise, highlighting the focus on the wealth management unit. Moody’s is currently reviewing UBS for a potential one notch ratings downgrade, citing the challenges facing the investment banking and wealth management units.
$13.25 (06/20/09)
