The Swiss financial giant UBS (NYSE:UBS) has made headlines in the last week after agreeing to acquire its competitor Credit Suisse Group (NYSE:CS), with the blessing from Swiss regulators.
Making it now the top player in the Swiss banking sector, & one of the biggest in the world, with the Financial Stability Board(FSB) listing it as one of a handful of global systematically important banks, is its stock a good Buy opportunity at the current price?
This article is the latest in my series called investing ideas for the tech generation, where I dive deeper into fundamentals that may be of interest to online traders.
Potential for Dividend Income
As of the writing of this article, UBS is offering a $0.55 dividend on common stock, with a 2.70% dividend yield!
As a shareholder who is focused on income-producing stocks, this can potentially serve as recurring quarterly income
for your portfolio.
Most Recent Financial Fundamentals
Since the results for Q1 are not due for a few weeks, let's look at this bank's most recent performence, that of 2022 end of year results.
Based on official commentary from the bank's CEO, Ralph Hamers, the company delivered a 2022 net profit of $7.6B, along with $60B in net new assets, and maintaining a CET1(common equity tier 1) capital ratio of 14.2%.
According to the Corporate Finance Institute(CFI), the Basel III Accords introduced certain capital regulations, where commercial banks must maintain a minimum capital ratio of 8%, 6% of which must be CET1.
Understanding the Business
An investor should first understand the business of the company they are investing in, in my opinion, as well as the larger segment it operates in. What all does UBS do exactly? It's own website shares some insight.
A key element of its business is wealth management, or looking after the money of high-net worth individuals & families, for a fee. Think of it like a bespoke private banker.
Asset management is another business line it is in. For example, it manages mutual funds that invest large amounts of capital into other assets like bonds & equities.
Investment banking is another major business line of UBS, such as advisory services for M&A clients.
Keep in mind that since it operates in multiple continents including the US & Europe, it also is competing with other top-tier banks for that business, since they do similar things.
Continued Interest Rate Risk
There is so much attention to the decisions of central banks such as the Federal Reserve, the ECB, Bank of England, and others, since those decisions have a major impact for the sector UBS operates in, banking!
An approach of continued interest rate hikes, according to central banks, is aimed at decreasing inflation. It also can increase interest income for those businesses which make a lot of money on interest, which are banks, since they can now charge higher interest on loans.
However, the double-edged sword of rising interest rates is that it can lowers the paper value of long-term bonds a company may have on its books, which is a well known concept since bond values & interest rates move in opposite directions.
We have already seen the effects of failed banks like Silicon Valley Bank holding a large portfolio of bonds they had to sell at a loss. The question remains, how many more banks are holding a large position in bonds whose values have dropped drastically as a result of rising interest rates, and how far will central banks go to inject liquidity into troubled banks via various tools at their disposal like special lending facilities.. solidifying one of the central banks' key duties which is being a lender of last resort?
Disclaimer: Any articles by this author are to be considered educational & informational, and not a recommendation by the author to invest in a particular asset or asset class, nor to be considered financial advice by a registered financial advisor. The author is not affiliated with nor compensated by any company mentioned in the article.