Vontobel Sector Report - Swiss Banks

Vontobel Sector Report - Swiss Banks

den 7 december 2016

Important legal information

Focus on the targets of Credit Suisse and UBS

In the Vontobel Swiss Banks Sector Report, we focus on the (very different) targets of Credit Suisse and UBS. We expect Credit Suisse to broadly reach its 2018 capital targets (CET1 ratio, CET1 leverage ratio) and exceed its adjusted operating expense targets for the Group. However, Credit Suisse’s divisional pre-tax profit targets for 2018 are very challenging and we do not expect them to be reached. While we believe UBS is likely to miss its Group cost/income ratio and return on tangible equity targets, our estimates imply that all operating divisions will at least reach the lower end of their target range by FY17E, with the difference related to the Corporate Center.


Will Credit Suisse change its targets at its Investor Day 2016 on 7 December?

Given that Credit Suisse already reached its full -year net savings target in 3Q16, the bank might announce additional cost savings measures. The adjusted operating expense target for 2018 could therefore be lowered to CHF 17 bn from the currently targeted CHF <18 bn. This would be CHF 0.6 bn below our current CHF 17.6 bn estimate for FY18E and would improve our FY18E Group pre-tax profit by 16%. However, this calculation assumes that everything else remains equal which, notably on the revenue side, might not be a very likely outcome. CS might also revise some of its challenging divisional pre-tax profit targets.


Costs remain a key focus – analysts expect UBS’s cost base to increase further

Given the uncertain revenue outlook, we believe cost management will remain a key focus of any bank management. After completion of the CHF 2.1 bn net cost reductions targeted for end-2017, UBS might announce the next level of efficiency management, absent any normalisation of the environment. As analyst estimates for UBS do not imply any reduction in the absolute cost level, they either believe the bank will not reach its net savings target or that the savings will be offset by new costs (e.g. from regulatory requirements).


Cooperations could massively improve efficiency – but only in the long-term

Both CEOs, Ermotti and Thiam, have talked about potentially far-reaching cooperations with other banks, with the goal of massively improving efficiency. While cooperations might ultimately become a necessity for many large banks, it is hard to imagine any major effects in the short- to medium-term due to the extraordinary complexities usually involved in such large projects.


CS: Hold, new PT CHF 13.2 (old: CHF 11.5) – UBS: Buy, new PT CHF 17.8 (old: CHF 15.7)

We will review our CS EPS estimates in more detail after the Investor Day. On the back of a higher long-term sustainable ROE, in light of higher USD interest rates and a stronger USD, we increase our UBS PT from CHF 15.7 to CHF 17.8 and our CS PT from CHF 11.5 to CHF 13.2. We keep our view that UBS is well placed compared to many of its large European peers in uncertain times in terms of advanced restructuring, deleveraging of illiquid legacy assets and capital and in being able to focus on the business and its clients, while others have to worry about building their capital base and redefining their strategy. A better cost performance was the highlight of 3Q16 and we expect more progress on costs to become visible in 2017. However, should the revenue environment not improve, more progress on the cost side will be critical.



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© 2016 Vontobel Equity Research. The objectivity of the report may be compromised by existing or planned business relationships between the producer and the analysed company and potential conflicts of interest arising thereof. Investors should therefore on no account use this report as the sole basis on which to make a decision. Please see the end of the document for more details on potential conflicts of interest and disclaimer information.



2022-12-01 15:47:19