April 28, 2017 / 12:45 PM / 4 months ago

UBS valuation lead over Barclays looks too wide

A partially illuminated (R) and a fully illuminated logo of Swiss bank UBS are seen on a building in Zurich December 18, 2012.Michael Buholzer/File Photo

LONDON (Reuters Breakingviews) - When it comes to being a bank chief executive, the received wisdom is that UBS boss Sergio Ermotti has a stronger hand than Jes Staley at Barclays. Even ignoring the UK bank chief executive’s recent disregard for whistleblowing rules, investors prefer his Swiss counterpart’s strategy of running a focused investment bank alongside a big wealth management business. That is reflected in valuations: UBS trades at 1.3 times tangible book value, almost twice Barclays’ 0.7 times. First-quarter results from both institutions bear out the difference - but only up to a point.

When it comes to capital markets, both UBS and Barclays lagged behind their five biggest U.S. peers, where average investment banking revenue jumped by a fifth in the first-quarter year on year. But a slight decline in fixed income matters less for UBS – which earns just 6 percent of its revenue from that business – than for Barclays, where it brings in 15 percent of the total. Moreover, UBS’ relative revenue underperformance is due to its absence from the fast-growing structured credit business. Barclays was dragged down by a poor showing in U.S. macro trading.

The non-investment bank bits of the two groups showed some divergence too. Pre-tax profit from Barclays’ core UK retail, wealth and consumer credit operations was largely flat year on year. Meanwhile UBS’s global wealth management arm reported a 19 percent jump in pre-tax profit and attracted 20 billion Swiss francs ($20 billion) of new money, net of outflows.

In other ways, however, Ermotti and Staley are not as far apart as the valuation chasm would suggest. Strip out the one-off writedown in accounting goodwill attached to Barclays’ African business and the bank earned a return on tangible equity of 9 percent – not far behind UBS at 10.9 percent. Returns at Barclays’ core operations, which later this year will represent the whole bank, matched those of its Swiss rival.

UBS’ market-leading position in wealth management means that when it does well – as in the first quarter – it merits a premium. But it expects outflows this year to match the 14 billion Swiss francs it lost in 2016, while the broader shift from active to passive asset management and greater transparency over fees could squeeze sector margins in the future, according to analysts at Deutsche Bank. Even if UBS can maintain its reinvigorated showing, Barclays’ relative discount looks too large.

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