Cevian Capital, an activist investor, recently revealed its intention to transform UBS into a banking powerhouse comparable to Wall Street titan Morgan Stanley. With a $1.3 billion stake, accounting for 1.3% of the company, Cevian Capital has demonstrated its confidence in UBS's potential. This development follows UBS's acquisition of Credit Suisse amid the banking crisis earlier this year.
Despite UBS's shares rising by an impressive 62% as it integrates Credit Suisse into its operations, Cevian sees even greater room for growth. Lars Förberg, co-founder of Cevian, emphasizes the significance of UBS's value potential. He commends the board and management team for their exceptional work in incorporating Credit Suisse and their commitment to further enhancing UBS. Förberg believes that if UBS closes the valuation gap with Morgan Stanley, which currently trades at 2x price to tangible book value, UBS shares could be worth CHF 50 ($58.10). At present, UBS's shares trade at 1.2 times tangible book value.
While UBS declined to comment on Cevian's increased stake, the bank is actively preparing a three-year integration plan tied to the Credit Suisse acquisition. Consequently, UBS's shares saw a notable increase of 4% on Tuesday.
It is evident why other banks envy Morgan Stanley's success. Although Morgan Stanley endured challenges during the 2008-2009 financial crisis, the bank astutely recalibrated its strategy afterward, placing greater emphasis on wealth management rather than trading and investment banking.
Wealth and Investment Management: A Key Revenue Source for Morgan Stanley
Fifteen years after the crisis, Morgan Stanley has successfully transformed its revenue streams. More than half of the company's revenue now comes from wealth and investment management. This strategic shift has proven to be a wise move, delivering consistent fee-based revenue compared to the volatile returns associated with trading and investment banking.
During this period, Morgan Stanley's shares have soared by over 400%, outperforming the KBW Nasdaq Bank Index, which has advanced by a little over 100%.
While Morgan Stanley's performance is impressive, it is worth noting that UBS, another prominent financial institution, also derives a significant portion (56%) of its revenue from wealth and asset management. However, UBS's valuation aligns more closely with European peers rather than American banks, despite having a substantial presence in the United States.
This disparity in valuation can be attributed to several factors. Firstly, Europe is still recovering from the aftermath of negative interest rates, contributing to a discount for European lenders. Additionally, Continental banks tend to be less aggressive on dividends and buybacks compared to their U.S. counterparts. Notably, during the pandemic, the European Central Bank mandated a freeze on dividends for banks under its supervision, while U.S. regulators merely imposed a cap on payouts.
UBS has the potential to become a serious competitor to Morgan Stanley. However, assembling all the necessary pieces for this transformation will be a slow and intricate process.