Zurich: An overhaul that marks the end of Swiss bank UBS’s big-league investment banking ambitions is prompting fund managers to switch their cash to shares in crosstown rival Credit Suisse.
UBS’s decision to shrink its investment bank and focus more on private banking has changed the way investors look at the two stocks, giving them a clearer choice than in the past, when there was less to distinguish one from the other.
“Which Swiss bank strategy is the more successful one depends heavily on political and market developments, but in the short term I think Credit Suisse will thrive,” said Basler Kantonalbank portfolio manager Andrea Guth.
“Investors take on more risk when markets pick up, and that would benefit Credit Suisse’s larger investment banking arm in the coming months.”
Like many Swiss-based fund managers, Basler Kantonalbank has typically held both banks. But the greater uncertainty surrounding UBS, which is in the first year of a three-year revamp, has prompted Guth to sell some of its shares and buy Credit Suisse.
In the longer term, non-Swiss investors say they are likely to hold shares in both to reflect the differing exposures they will have from one being more focused on investment banking, with the more variable rewards that brings.
“The capital level for UBS is more attractive, and the long-term rating should rise higher as it becomes more of a private bank,” said Andrea Williams, manager of the Royal London European Income fund.
“However, in the short term, there are risks attached to deleveraging the balance sheet and reducing the size of the investment bank, and the question as to whether a smaller investment bank is viable in the long term with such a smaller global scale.”
“You can probably own both in the portfolio, but in the medium term, I prefer Credit Suisse due to its exposure to wealth management and investment banking,” she added.
Credit Suisse’s 2012 dividend of 0.75 francs with 0.10 francs in cash and the rest in shares, equated to a dividend yield of 3.8 per cent. UBS’s payout of 0.15 francs per share yielded half that.
Credit Suisse has pledged to return to a higher, all-cash dividend when it has bolstered its capital, planned for mid-year, while UBS is targeting a 50 per cent payout ratio from 2015.
Shares in Credit Suisse have risen more than 17 per cent since the start of the year, outperforming a 6.8 per cent increase in the European bank sector and UBS’s 5.8 per cent rise.
While fund managers are voting with their cash, equity analysts appear to be behind that trend, as UBS shares are still favoured with more “buy” recommendations than Credit Suisse. Five analysts recommend UBS as a “strong buy” and 15 as a “buy”, while Credit Suisse won four “strong buy” backings and 12 buys, according to data compiled by Thomson Reuters.
Neither bank would comment for this story.
For years, the Zurich-based lenders have pursued near-identical strategies to cushion swings in investment banking profitability with lower-risk private banking business.
But UBS’s greater focus on private banking has left it slightly more exposed to an international crackdown on tax evasion in Switzerland that is making the country less attractive to investors drawn by its banking secrecy.
Overall, Switzerland’s $2 trillion finance industry is braced for what consultancy Zeb/Rolfes Schierenbeck Associates says could be 200 billion francs in withdrawals by 2016, out of 789 billion francs it believes sit, untaxed, in Swiss banks.
UBS has said up to 30 billion francs in funds from its European customers are at risk, while Credit Suisse has said its clients could pull out up to 35 billion francs.
A probe by German prosecutors into allegations UBS helped its wealthy citizens evade €204 million ($270 million) in taxes is unsettling German clients.
UBS is likely ultimately to settle these accusations, as Credit Suisse did in 2011 by coughing up €150 million euros.
The threat of civil lawsuits arising from UBS’s involvement in an interest rate rigging scandal adds to the uncertainty.
UBS was fined $1.5 billion last year for its role in the manipulation of benchmark rates, while Credit Suisse says the financial impact from the affair is “not material”.