) is a financial services firm that offers a strong combination of
wealth management, asset management and investment banking services
on a global and regional basis. Its trading division accounts for
about 40% of the
$19.30 Trefis price estimate for UBS's stock
, which is about 8% ahead of the current market price. UBS competes
Morgan Stanley (
), JP Morgan (
), Credit Suisse (
), and Goldman Sachs (
) in trading, investment banking and asset management services.
We have a $19.80 price estimate for UBS
, which is about 8% ahead of the current market price.
Trading Assets Increasing
The relative increase of Bonds, Currencies &
Commodities (BCC) trading assets in 3Q FY10 from 2009 can
potentially provide some insight on the outlook for these banks in
terms of their sales & trading activities. The trading assets
for these businesses increase has varied from as high
as nearly 20% by UBS and 17% by Deutsche Bank to only 3% by
Citigroup. Goldman Sachs and Morgan Stanley and Credit Suisse have
been on the conservative side with their BCC trading assets
increase from 2009 being 8% and 12% and 11% respectively.
We consider the trading assets for banks as the fair value of
their financial instruments, which they use for trading
purposes. It reflects the proprietary capital they can
leverage for generating returns. For most of the
investment banks we cover we have separated their sales &
trading division into Bonds, Currencies &
Commodities Trading and Equities Trading. Then we calculated
their relative contribution to each of the banks' stock price and
discovered that the trading division is one of the largest drivers
to value for these banks when compared to other segments like
M&A, Equity Underwriting and Debt Origination.
Assets for Bonds, Currencies & Commodities
Trading Asset Bases Among Banks
The above chart shows the change in trading asset bases for BCC
from 2007 to 3Q 2010. For most of the banks, the trading
assets declined between 2007 and 2009, but recovered
slightly in 2010. Though 2010 has been a better year, trading has
been weighed down by sovereign debt risk and interest rate
volatility in Europe. This has limited the increase in trading
asset bases for many asset classes and impacted trading activities
for the banks in the 4Q.
In 2006, among the above banks, UBS had the largest amount of
BCC trading assets, totaling around $760 billion. However,
this decreased to around $220 billion by 2009
, reflecting the poor performance of UBS, with it being among
the banks requiring significant amount of sovereign bailout
However, the global economic environment is slowly improving and
has led to an increase in volumes and liquidity across most assets
classes. As a result, we have seen an increase in the BCC trading
assets for the above banks.
Upside to UBS Trading Recovery
UBS has the heaviest exposure to trading and so its stock price
can be more vulnerable to the profits from its trading actiivities.
The yield on trading assets for BCC for UBS decreased from
1.4% in 2005 to -8% in 2008, with the bank incurring heavy losses
on its trading portfolio during the economic downturn, when returns
across most major asset classes were sharply declining.
However, with the global economic environment slightly improving
in 2009, the Yield on Trading Assets for Bonds, Currencies &
Commodities increased to -0.25%. We expect the Yield on Trading
Assets for Bonds, Currencies & Commodities to increase to
nearly 5.2% towards the end of the Trefis forecast period, with the
improving economic environment increasing liquidity and improving
returns across asset classes.
If this however trended by 100 basis points higher to around
6.25% by the end of our forecast period, this would add around 10%
to our price estimate.