RBC Capital has stated that more clarity is needed on UBS Group AG (NYSE:UBS) following its takeover of embattled rival Credit Suisse in order to put together a comprehensive investment case.
Following the first quarter update from the Swiss banking giant, RBC's estimates and price target of $20 for UBS remain mostly unchanged.
In Q1, UBS provided a few qualitative updates but lacked specifics in many quantitative aspects. RBC has updated some input factors of their previous work on the deal math, still relying on numerous assumptions.
UBS's Global Wealth Management (GWM) trends in Q1 were not as strong as expected, leading to downgrades in net interest income guidance. UBS pointed to potentially subdued client activity and weaker sentiment affecting flows in Q2 2023. Visibility on Credit Suisse's sustainable earnings stream remains low.
RBC continues to estimate cost savings at $8 billion with revenue dis-synergies at $2.7 billion, or 5% of combined costs. Since the last update, spreads have come down, positively impacting earnings estimates. RBC has also lowered their cost of equity to 12% from 13%.
RBC no longer assumes that UBS will book the first loss piece or use the government guarantee. With lower risk-weighted assets, the estimated CET 1 ratio increases to 14.7% at year-end 2025. RBC does not factor in additional buybacks on top of their assumption of $5 billion per annum from 2025.
The unchanged price target of CHF 20 has many moving parts, making precision difficult. The weakening of the USD vs CHF was a headwind to valuation.
UBS is now considering other options for the Swiss business, such as an IPO of a minority stake in Credit Suisse Schweiz. A partial IPO might only create value for UBS's shares if the company can invest the capital uplift, for example, through additional buybacks.
RBC notes that UBS is set to provide more details on the new group's common equity tier 1 ratio and liquidity coverage ratio in May, pro forma financials in the summer, and value drivers of the deal in the second half of the year. This increased visibility could act as a catalyst for the stock.