With UBS at a material discount, JPMorgan analysts Kian Abouhossein and Amit Ranjan continue to prefer UBS over Morgan Stanley for wealth management exposure in a global context.
In their March 15 Europe equity research report, the analysts highlight that UBS is part of their European banks top picks portfolio. In their view, UBS’s valuation discount of about 40% to Morgan Stanley on a price to tangible book value (P/TVB) should narrow in the medium-term, although it is not expected to close completely.
They note that Morgan Stanley trades at 2.2x of its 2023 TVB, compared to UBS at 1.3x P/TBV. While the return profile for the two banks are also very different near-term, they see UBS generating return on tangible equity (RoTE) of 14% in 2027, versus Morgan Stanley’s 17.5%.
“Morgan Stanley has a long-term return on average tangible common shareholders’ equity (ROTCE) goal of 20% while UBS has indicated an 18% reported return on common equity tier-1 (RoCET1) by 2028 as part of long-term value creation — hence UBS in our view has further re-rating potential if the target is achieved,” the analysts add.
In the analysts’ view, the premium valuation of Morgan Stanley versus UBS has been well deserved, with Morgan Stanley showing a strong track record of earnings, TBV per share growth of 6.8% p.a. over 2014-2020 which was double the 3.4% p.a. growth at UBS as well as superb execution on large and complex integrations.
That said, they see the acquisition of Credit Suisse by UBS providing an even better opportunity for the latter to cement its position as the leading truly global wealth manager — a top five equities player with an unrivalled Swiss franchise being the undiscounted jewel.
In JPMorgan’s view, UBS has a better business mix than Morgan Stanley. Both are generating about 60% of earnings from asset gathering business in 2027, while UBS Investment Bank is only contributing 15% to the group earnings consuming under 15% of risk-weighted assets (RWAs) versus 40% of earnings and 50% of equity at Morgan Stanley. UBS also has the stability of the combined Swiss bank generating almost one third of earnings and about 20% of market share.
“We also forecast an acceleration in capital returns from UBS in 2026, as the integration-related impacts fade away, with total yield of 8% inline with Morgan Stanley and improving towards over 10% depending on integration progress and we forecast TBV per share growth of 5% p.a. for UBS versus 4% at Morgan Stanley over 2023-2027.
“UBS wealth management pre-tax margins outside US have been in the 28-40% range over 2016-2023 with an average of 33%, underscoring the earnings power of the franchise, and the Credit Suisse integration further widens the gap to peers in growth regions — especially Asia where competition is two to three times smaller in ultra high-net worth,” they add.
The analysts have a price target of CHF31 on UBS, based on an exit 9.4x 2027 P/E. They believe UBS should re-rate as the heavy restructuring period over the next 18 months gets discounted and investor focus shifts to its long-term franchise. “We are strong believers in UBS long-term cash flow generation, which should be reflected in the share price and hence we see potential for re-rating beyond CHF 30,” they conclude.
