UBS (
UBS
) seems to be taking its plan to go back-to-basics quite seriously
if recent reports that highlight the banking group's interest in
GE's
(
GE
) Swiss consumer lending business are to be believed. The
largest Swiss bank is reportedly vying for Zurich-based GE Money
Bank Switzerland in a move to strengthen its existing retail &
corporate banking business.
Such plans would be another big step towards UBS's goal of
reducing its focus on investment banking to generate revenues by
building up its wealth management and retail banking businesses -
especially after the bank's decision to slash 10,000 jobs across
the organization just months ago (see
Poor Performance Forces UBS To Announce Drastic Job Cuts
). UBS's shifting focus out of investment banking - largely because
of strict capital requirements laid out by Swiss regulators and due
to poor performance in the recent past - has made it important for
the bank to look for growth opportunities that can make up for the
considerable decline in expected revenues.
We maintain
a $15 price estimate for UBS
, which is about 10% below current market prices.
See our complete analysis of UBS here
Our analysis of UBS shows that its retail & corporate
banking operations contribute to nearly a quarter of its value -
almost the same amount as its trading business (fixed-income and
equity combined). It would hence make perfect sense for the bank to
add to its retail banking business to compensate for a planned
decline in its trading business. The switch has its obvious
trade-off though - while the retail banking business cannot compete
with trading in terms of revenue generation capacity, it wins
hands-down when it comes to stability in revenues. And in the
aftermath of the $2.3 billion loss linked to unauthorized trades
that the bank took last year (see Questionable Risk Controls Cost
UBS More than Rogue Trades), its decision to shun the volatile
trading business for a more steady top-line growth comes as no
surprise.
GE's decision to do away with non-core assets like the GE Money
Bank Switzerland business, hence, comes at the right time for UBS.
According to GE Money Bank Switzerland's annual report for 2011,
the business had CHF 3.96 billion ($4.27 billion) in outstanding
loans at the end of last year. The business operates out of 25
branches across Switzerland and has around 700 employees. It is
currently valued at around CHF 1.5 billion ($1.6 billion).
One would expect UBS to be eager to acquire the business also
because of its negligible presence in the Swiss consumer lending
industry dominated by its competitor Credit Suisse (
CS
) along with GE Money Bank. Such an acquisition will immediately
make it the leader in the industry while adding to the total
outstanding loan volume for its retail & corporate banking
business. UBS would also expect cost synergies from the addition of
GE Money Bank's branches to its vast branch network as it would be
able to cut down on various back-end and administrative costs.
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