UBS (UBSG:VTX) Analysis

For once, we are going to focus on a company with a sulphurous reputation, which it has been dragging around for ages, and especially since the end of the last century. It was around this time that the Union Bank of Switzerland and the Swiss Bank Corporation merged to create a wealth management giant, the largest in the world. However, the history of UBS goes back to the dawn of time, to 1854, when six Swiss wealth management banks created a consortium called "Bankverein" in Basel. But for the past twenty years, UBS has become, in the eyes of the general public, and quite rightly so, everything that is most detestable in the financial system, namely tax evasion, systematic fraud, unclaimed Jewish funds, etc. Like its leaders at the time, led by Marcel Ospel, it has shown deplorable arrogance and complacency towards the people and its elites. However, it was the Confederation and the SNB that had to save it in 2008. Through its actions, UBS certainly bears some responsibility for the end of banking secrecy, a cardinal Swiss value for centuries. Even today, it is dragging around old skeletons because of its actions and its reputation, with ongoing trials in several countries.

This deplorable image has a positive side for investors. UBS, despite its enormous size, is shunned by the markets, which makes it attractive from a price point of view. The Swiss financial giant is trading at:

• 14.15 times current recurring earnings
• 13.65 times average recurring earnings
• 1.08 book value
• 1.24 times tangible assets

The dividend yield is also particularly generous, at 4,36%, even though the distribution ratio is only 61,73% compared to current profits (and 59,54% compared to average profits). Moreover, not satisfied with this generosity, UBS has increased its distributions at an impressive rate of 21,06% per year on average (over the last five years).

Frankly, if the analysis stopped there, we would jump on it. But with banks, you always have to be wary of appearances, because they can be very misleading. Investors at the beginning of the 21st century remember this. Indeed, behind these enticing figures lies a much less rosy reality. UBS has an unfortunate tendency to display a free cash flow in the red. Negative free cash flow is certainly not extraordinary with banks, because of their particular operating mode based on debt, which offers a significant leverage effect. Cash flows can vary quite significantly from one year to the next. What is special about UBS is that free cash flow certainly fluctuates a lot over the long term, but with a negative bias. Over the last five years, it has been strongly positive once (2013), twice barely positive (2014 and 2015), once quite negative (2016) and once strongly negative (2017). The trend is therefore rather bad... It should also be noted that a negative FCF is not very good for the dividend, which has also fallen at UBS since 2015.

Another indicator, recognized for its reliability, also sheds new light on this apparently attractive valuation of UBS. The EBITDA only amounts to 1.87% of the enterprise value, which is apparently contradictory with the fairly cheap PER indicated above (we should indeed have figures closer to 10% for the EBITDA/EV). This is nevertheless easily explained by the capital structure of UBS, which is strongly marked by debt. Indeed, this amounts to 4.43 times the equity, which is very high, even for a bank. In addition, this debt does not tend to decrease, quite the contrary, unlike the assets which are slowly but surely decreasing. The Swiss bank undeniably has some difficulties in creating value, which is reflected in a share price that has been stagnating for about ten years. Profitability is not there, with an ROA of only 0.43 (still slightly up) and an ROE of 7.65%.

In short, with UBS, we have the vague impression of being faced with a road accident victim who has been living in a coma for about ten years. The company survives, but cannot wake up, much less get up. If we must keep a positive image of all this, it is because its case seems more or less stabilized. The volatility of the current price, with 9%, could even make defensive stocks pale. And then, even if the dividend is not immune to a downward adjustment, it remains particularly generous. Undeniably, UBS is still convalescent, and therefore shunned by investors, in good part rightly so. Its valuation in relation to its profits, while attractive, should be taken with a pinch of salt because it is offset by a negative FCF and a capital structure heavily based on debt. On the other hand, the price relative to the assets is particularly interesting and also explains why the price has stabilized for several years at a low level.

History has often presented us with situations like this. Companies that have been through hell and have stagnated for many years, shunned by the market, before being reborn. But sometimes it takes them a very long time to take off again, sometimes they stagnate forever and sometimes they end up dying anyway. If UBS has one indisputable quality that could go in its direction, it is precisely its history. Provided it has not forgotten it.