UBS Group

A 53% jump in equity trading and 22% growth in wealth management transactional income drove UBS' second-quarter underlying pretax profit 12% past consensus. The debate has shifted from capital and the Credit Suisse integration to revenue durability.

Why it matters: With the integration in its final phase and cost savings largely delivered, we expect cost growth to normalize. Revenue durability now becomes the focus. Investment banking and wealth management transaction income contributed 30% of UBS's revenue in 2023; it now contributes 38%. Investment banking and transaction income swing with market sentiment. Investors tend to pay a lower multiple for these volatile revenue lines than for recurring wealth management fees or Swiss personal and corporate banking Our analysis shows that wealth management recurring fee margins are declining, especially in EMEA and Switzerland. Should volatile revenues normalize, this erosion makes it harder for the fee base to pick up the slack.

The bottom line: We maintain our CHF 40 fair value estimate for narrow-moat UBS. We view the share as fairly valued. A strong first half, ahead of consensus, should drive earnings upgrades. We take a more conservative stance: with cost savings ending, the cyclical lines that carried results offer less earnings visibility.

Coming up: The bear case for capital is essentially the current proposals from the Swiss federal council. We think these are largely priced in; changes in parliament would only soften the package—which is upside risk. Surplus capital absorbs most of the increase and capital generation covers the rest. As we expected, the fresh buybacks announced are

Bears say: Normalizing volatile income to its 2023 share would cut pretax profit by roughly 13% even after variable-pay offsets, which would pull return on common equity Tier 1 down to 15% from 17% currently.

Our fair value estimate for UBS is $50 per share—1.9 times its 2025 tangible book value and 12 times our projected 2027 earnings per share. By 2027, we anticipate that the Credit Suisse merger will be fully integrated, with most cost savings achieved and profits returning to normal levels. Despite a significantly larger capital base, UBS should deliver a midcycle return on tangible equity of around 15%, with upside risk if the stricter capital requirements are more onerous than expected.

We see earnings growth of 36% for 2026, largely driven by restructuring costs from the Credit Suisse integration disappearing. UBS will see the last of the benefits from the merger in 2027, but we expect it to be largely completed by 2028.

Fee and commission income should continue to benefit from rising invested assets, provided there are no significant market corrections. This is supported by the secular trend of global wealth expanding faster than nominal GDP, as well as demographic shifts such as aging populations. UBS also aims to boost net client inflows, which should further support asset growth.

With interest rates in Switzerland returning to zero, net interest margins at the Swiss universal bank have been under renewed pressure. Meanwhile, securities trading revenue, which has benefited from elevated market volatility, is likely to moderate over the next few years.

We expect that the realization of merger-related efficiencies and lack of restructuring costs will result in a 3% annual decline in operating expenses over the next three years, reducing the cost/income ratio to 67% by 2028, from 81% in 2025.

Despite the potential for stricter capital requirements, UBS appears well positioned to grow its dividend by 13% annually and gradually grow its current $3 billion annual share repurchase program to $4.5 billion by 2028. Enhanced profitability should support sufficient organic capital generation to meet the capital increase requirements proposed by the Swiss government, even under more-stringent regulatory scenarios.

We assign UBS a Narrow Morningstar Economic Moat Rating based on switching costs and intangible assets in the wealth and asset management operations.

As with commercial banks, we believe that switching costs for wealth managers are primarily implicit and include losing a valued relationship with the incumbent advisor, the time necessary to find and vet a new advisor and firm, the paperwork involved in moving accounts, and the mental energy needed to choose and approve a new investment vehicle. Over the past decade, UBS has consistently had net asset inflows from its wealth management clients. Net client inflows suggest that switching costs could be present. Credit Suisse's wealth management business also had net inflows before its investment bank's continued risk management failures cast doubt on its going-concern status.

Ultra-high-net-worth clients value strong relationships with their bankers, typically built over years and often spanning multiple generations. UBS is increasingly tilting its client base toward ultra-high-net-worth clients—currently, they account for approximately 40% of UBS' investable assets in its wealth management operations. Credit Suisse's wealth management business has an even greater tilt toward ultra-high-net-worth clients. We believe that complexity supports moats in wealth management and that catering to ultra-high-net-worth individuals and family offices constitutes a much moatier business than servicing the mass affluent market. Ultra-high-net-worth individuals and family offices have needs nearly as complex as those of institutional investors. They may require access to structured financing, generational wealth planning, family office support, and international tax planning across multiple geographies. They also tend to have much more complex portfolios, often including family businesses, real estate, hedge funds, and other illiquid assets. Advisors at lower-tier firms are often unable to address these issues. Hiring professionals to address these issues is not cheap; only a few companies have enough ultra-rich clients to make the costs worthwhile. Many have international holdings, which increases the complexity of compliance with anti-money-laundering, know-your-customer, tax reporting, and other regulations. It will have deep relationships with its clients spanning various investment, transactional, and lending products—often integrated—which makes pricing opaque. Products are often tailored to the client's needs, making it difficult for clients to easily compare pricing. The daunting prospect of untangling a client's web of products with a bank is often enough to prevent the client from moving to a competitor.

Private bank clients will typically have not only investment products with their bank. The distinction between a private bank and a wealth manager is often blurred and overlooked. We believe it is crucial. A private bank that offers its clients transactional and lending products raises switching costs relative to a wealth management business that offers only investment products.

In wealth management, a moat for intangible assets is built on a firm's reputation, specialized expertise, and the scope of its services. After its 2009 bailout by the Swiss government, UBS has successfully reestablished its reputation as the world's preeminent wealth manager/private bank for ultra-high-net-worth individuals. While a well-known and respected brand is essential to attract clients, it is even more critical for incumbent and prospective bankers/relationship managers. UBS received client inflows of $7 billion in the 10 days following the announcement of its takeover of Credit Suisse. UBS' brand and reputation provided clients with sufficient comfort. We view this as a textbook example of an intangible asset moat at work for a wealth manager.

Wealth management deposits are less stable than retail deposits, and wealth management clients are more price-sensitive. Wealth managers like UBS offer multiple investment products and can recapture deposit outflows in other products—this is an advantage over retail banks, which typically have a more limited product range.

An evaluation of the banking system in which a bank operates is critical for us to have a high level of conviction in the moats we find for an individual bank. We define a banking system broader than merely the regulatory environment in a particular jurisdiction. Competitive, political, and economic elements also contribute to the robust system that can withstand banking crises. At a global level, we have an equally positive view of the Australian and Canadian banking systems only. The Swiss regulatory environment is exceptionally strong, and the Swiss National Bank's requirements often exceed those of the Basel Accords and the European Banking Authority. Switzerland is one of the world's most stable democracies, and its devolved, cantonal system of government limits the potential of populist extremist parties.

Switzerland has a long history of being the banker to the world, and Swiss banks manage 25% of cross-border assets worldwide. Historically, Swiss banking was best known for its famous numbered, or anonymous, accounts. The US clampdown on offshore tax structures and antiterrorism measures has eroded the Swiss banking sector's reputation for secrecy. The failure of Credit Suisse damaged the popular image of the inviolable stability of Swiss banks. However, we believe that Swiss banks remain attractive to the world's elite for two reasons: Swiss neutrality and the Swiss franc. Both factors speak to downside protection and the safeguarding of wealth. Switzerland has been neutral since 1815 and has escaped the ravages of both World Wars. Switzerland is also not aligned with any power bloc: It is neither a member of the European Union nor a member of NATO. Even for wealthy citizens of stable democracies in the rest of Europe or North America, Switzerland serves as a safe haven, offering diversification and liquidity to their portfolios. Investors have long viewed the Swiss franc as a safe-haven currency. Removing the Swiss franc's peg against the euro in 2015 enhanced the former’s attractiveness as a portfolio diversification tool to minimize risk. The Swiss franc also protects against any debasement of other major currencies through loose monetary policies.

UBS' Swiss, European, and Asian wealth management operations are highly profitable, bolstered by its market-leading position in the high- and ultra-high-net-worth markets.

The US wealth management business is a free option: Either fix it or sell it. Both options will create shareholder value.

The assets of wealthy individuals are expected to continue growing ahead of nominal gross domestic product, especially in the Asia-Pacific region, where UBS is the clear market leader.

The Credit Suisse merger and the likely steep increase in minimum capital requirements make it very challenging for UBS to return to its premerger profitability ambitions.

The prospect of increased capital requirements will continue to weigh on the share price, as it can still be years before they are finalized.

Volatile investment banking still consumes 30% of UBS' capital. UBS has struggled to match the profitability of the US bulge-bracket investment banks.