Scent of a banker: Wounded UBS invites takeover speculation

Had Bradley Birkenfeld worked for a small Swiss bank, his tales of smuggling diamonds in a toothpaste tube – among other ways of helping American clients fool the taxman – would have merited only a line or two in the newspapers. But Mr. Birkenfeld was employed until 2006 by UBS, Switzerland’s biggest bank and the world’s biggest wealth manager, looking after SFr2.8 trillion ($2.7 trillion). In his seven-page confession to a Florida court in June he claimed he was just a cog in a tax-evasion machine run by UBS. The world’s press went to town.

For UBS the allegation could not have come at a worse time. It is just one battle in the war to save its business model and perhaps its independence. Since April 1st, when it revealed that write-downs on its American mortgage-related assets had reached $38 billion, the bank has been fighting to sustain its share price and its credibility.

Rumors abound that UBS, or parts of it, are for sale. Sum-of-the-parts valuations make a share price of SF21.26 look bombed out. Start with UBS’s crown jewels: its Swiss and International wealth management arm, which hauls in about 40% of net profits. On today’s harsh earnings multiples of 11 or 12, the business should be worth between SFr14 and SFr16.5 a share.

Placing a value on UBS’s tattered investment bank requires a leap of faith: more write-downs are possible. But this is still a business forecast to generate a net profit of between SFr2 billion and SFr2.5 billion next year. Put those earnings on a crunched down multiple of six or seven and the present share price is already within reach. That is before throwing in the sizeable profits from asset management, business banking and wealth management in the U.S.

This disconnect is not lost on anyone. But a simple split does not make sense, at least for now. If the investment bank was to stand on its own two feet and was moved towards the tougher leverage standards that U.S. banks have to meet, it would need perhaps as much as SFr20 billion more capital. This theoretical capital “deficit” makes any break-up much less of a slamdunk.

The best way for UBS stock to catch up with what it “ought” to be worth is to show a quick return to form for private banking. This partly depends on UBS reassuring investors that it will hang on to its best client advisers, not just keep the net number of client advisers looking healthy. More evidence that private banking is back on track is needed to get UBS’s stock moving again.

For despite a world-beating wealth-management arm, its business model is dented and its board has not come up with a new strategy. Predators are rumored to be circling. What may save UBS is the generally sorry state of its industry: few would-be buyers have the ready cash for such a large deal. Hiving off divisions will also take time and money. UBS is more likely to soldier on alone, shrinking its business and licking its wounds.