Analysts react to UBS’ huge earnings

Shares of UBS rose to a 15-year high on what analysts called a “historic” earnings report, although Deutsche Bank said the Swiss banking giant could remain a “construction site” for some time.

The group reported second-quarter net profit of $28.88 billion Thursday on the negative goodwill of $28.93 billion from its acquisition of stricken rival Credit Suisse, which was brokered by Swiss authorities in March and completed on June 12.

UBS also announced that it will fully merge Credit Suisse’s Swiss banking unit, a major profit centre, in 2024. This will result in 1,000 layoffs as well as another 2,000 headcount reductions across the group as part of a comprehensive restructuring of the bailed-out companies. lender.

UBS shares were up 5.6% by mid-afternoon in Zurich on Thursday, touching levels not seen since late 2008.

Notably, UBS highlighted that the huge net asset and deposit outflows that Credit Suisse had seen over the past year had finally begun to reverse, turning positive in June. Meanwhile, UBS’ CET1 ratio, a measure of banks’ creditworthiness, rose to 14.4% from 14.2% in the same period last year, despite stalling one of the largest mergers in banking history.

“UBS core business appears unaffected by the deal,” Benjamin Joy and Sharath Kumar, analysts at Deutsche Bank, said in a research note Thursday. Non-core funds are large but made solid progress and CET1 ratio was strong/ahead of expectations in Q2 2013. “. .

“It is clear that the group remains a building site in the near term, but we believe that this group of results and announcements should give confidence to the upside in the medium term, ie buy.”

That bullish sentiment was echoed by Bruno Verstreet, partner at Zurich-based Lakefield Partners, who told CNBC that Thursday’s result was a “historic once-in-a-blue-moon number.”

“Obviously the good news is that stabilization has already come and the market seems to be de-risking what was there and what could still be some dead bodies stashed in the treasury,” he said, referring to Credit Suisse’s turbulent history. Out of date compliance and oversight failure.

“It appears that is not the case now, it seems to be under control, and I think investors are reacting positively to that.”

Earlier this month, UBS announced that it had terminated the CHF9 billion ($10.24 billion) loss protection agreement and CHF100 billion general liquidity support that the Swiss government put in place when it agreed to take over Credit Suisse in March.

Verstreet noted that cutting any financial dependence on the Swiss government and central bank freed UBS to decide whether to absorb Credit Suisse’s local banking unit without succumbing to any political pressure. The prospect of more mass layoffs may not be very popular among some parts of the Swiss political and public sphere.

“It’s difficult to put together such a strong result and then announce layoffs at the same time. I think there will be different ways of layoffs in order to get to that integration and take advantage of the cost-cutting opportunity that exists. That’s clearly a positive thing,” Verstreet told investors.

However, he said it was in the interest of the Swiss public to have a “strong bank”.

“A third of Switzerland deals with the group as a whole. They want to have a stable group, they don’t want to create a mastodon that is too big to be salvaged. I think this mitigation of risk, this shift of risk is obviously the transfer of one culture to another,” Verstreet added. Something that will be good for the general public in the end.”

UBS on Thursday announced plans to reduce non-core units at Credit Suisse’s troubled investment bank, wealth management and asset management divisions, which it said were “not in line with our strategy and policies”.

Gildas Suri, chief analyst at Paris-based alternative investment firm Axiom, told CNBC on Thursday that the market will be watching UBS’s efforts to shrink these non-core divisions closely, and is seeking further guidance on the future of the bank’s CET1 ratio.

“What’s very positive is the actual inflows, so the reversal of deposits is happening, and that’s also a very good sign for the franchise,” Suri said.

“The consolidation of the Swiss operations from Credit Suisse is very much in line so there is nothing new there but what is going to be very interesting is really the timetable for the share buyback and for that we need to pay off the financing line from the Swiss National Bank as well as prove that UBS has access to the AT1 markets after delisting Credit Suisse AT1s in March.

The Swiss government, central bank and UBS came under fire in March after the emergency rescue package included a controversial writedown of CHF16 billion on Credit Suisse AT1 bonds.