The Market Is Wrong on UBS

Swiss universal bank UBS (NYSE: UBS  ) reported its third-quarter earnings today, with results in line with expectations ... or published expectations, in any case. Shares rose more than 10% at one point today, against a 2.66% gain for the entire Swiss Market Index. The jump hints at the depth of pessimism that has burdened this stock.

Business- vs. accounting-based gains
It's worth pointing out that the only reason the bank posted a profit at all this quarter is a massive CHF 2.2 billion gain ($1.9 billion at today's exchange rate) booked on its own debt, which was marked down in the market. (How is that possible? See my explanation of mark-to-market accounting.) The banks could well be forced to reverse part or all of those gains at the end of this quarter.

Still, UBS appears to have turned the corner in restoring investor confidence. Multiple rounds of expensive capital raises have lifted the bank's vitals: At 10.8%, UBS's Tier 1 Capital ratio compares smartly with that of U.S. peers JPMorgan Chase (NYSE: JPM  ) at 8.9%; Bank of America (NYSE: BAC  ) at 7.55%; and Citigroup (NYSE: C  ) at 8.2%.

At that price, it's yours
That said, I don't share the market's enthusiasm, which looks precariously balanced on desperation, rather than solidly situated on fundamentals. At 12.5 times the lowest estimate of 2009 earnings (and that's before today's jump in the share price), it would take more than a few obsequious private bankers to get me interested in this stock. Particularly since I expect intense competition for client assets from Bank of America/Merrill Lynch (NYSE: MER  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley (NYSE: MS  ) in the years to come.

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Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (7)

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  • Report this Comment On November 04, 2008, at 5:05 PM, weiwentg wrote:

    I agree - UBS's franchise has been badly damaged by the subprime debacle and stockholders have been diluted by the Swiss rescue plan (albeit not as badly as with the UK plan). I'm not that interested in Credit Suisse right now either, although CS did position itself a lot better than UBS.

  • Report this Comment On November 05, 2008, at 3:07 AM, bourse wrote:

    I agree too - don't forget, they are loosing clients in a rapid pace in private banking and in asset management which is still there core business.

    Certainly at one point in the future this will stabilize and money will stop to flow out.

    But how much will they earn then? with new regulations for the banking sector at the horizon and much lesser appetite for risk. How big their investment banking will be in some years? A lot of open questions!

  • Report this Comment On November 05, 2008, at 9:19 AM, TMFAleph1 wrote:

    Bourse,

    Thanks for your comment. You've hit the nail on the head; I absolutely agree. In fact, for the purpose of brevity, I actually removed a paragraph from the article before submitting it that contained the very things you point to.

    Regards,

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On November 05, 2008, at 10:37 AM, johnnymaynard wrote:

    I am bullish on all Plunge Protection Team (PPT) banks.

    UBS is a member of the club, and, as a primary dealer of the Fed, has inside information to make money pumping and dumping stocks, like all the others, including JP Morgan, Citigroup, etc. They will all prosper in this roller coaster market, because of this illegal, but profitable connection.

    UBS also happens to be the biggest physical gold bullion bank, although it is not such a big player on COMEX, which is dominated by JP Morgan and HSBC, both of whom are also PPT banks. With real gold demand hot, and the COMEX banks set to allow the gold price to rise back up to about $1,200 per ounce, both to prevent the run on deliveries, and to get more speculators into the market, UBS cannot help but make tons of money in that division.

    I don't like the PPT banks, because they are all corrupt, but, now, with their share prices down, and the favor of the authorities being bestowed on them everyday, and their pump & dump license to steal very much in force, to the detriment of taxpayers all over the world, I see reality. If you can't beat em, join em!

  • Report this Comment On November 05, 2008, at 1:45 PM, TMFAleph1 wrote:

    "UBS is a member of the club, and, as a primary dealer of the Fed, has inside information to make money pumping and dumping stocks, like all the others, including JP Morgan, Citigroup, etc. They will all prosper in this roller coaster market, because of this illegal, but profitable connection."

    Those are serious allegations and I think you'd be at pains to offer any shred evidence to support them. Furthermore, primary dealers trade in government securities -- there is no link to stocks.

    Alex Dumortier (XMFMarathonMan)

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